Default
The failure of a borrower to make scheduled debt payments or fulfill other obligations under a loan agreement.
What is Default?
A default occurs when a borrower fails to meet the legal obligations of a debt contract. The most common trigger is missing a scheduled interest or principal payment, but debt agreements also include financial covenants — such as maintaining minimum interest coverage ratios — whose breach constitutes a technical default even without a missed payment. Defaults range in severity: technical defaults may be cured or waived; payment defaults often trigger acceleration clauses that make the entire debt immediately due. Sovereign defaults, where countries fail to repay government bonds, can trigger financial crises. After a default, creditors typically attempt to restructure the debt, and credit rating agencies immediately downgrade the borrower to "D" (default) status.
Example
When Lehman Brothers failed to make payments on its commercial paper in September 2008, it triggered the largest corporate bankruptcy in US history at the time ($613 billion in debt). The default immediately froze the commercial paper market as money market funds suffered losses, illustrating how a single large default can have cascading effects across financial markets far beyond the immediate creditors.
Source: SEC — Lehman Brothers Bankruptcy