Question

Name and briefly explain three classes of defaulting clients

Answer 1

The three classes of defaulting clients may be said as follows:

Default on Secured Debt

The lender or investor has some recourse to reclaim the funds when an individual, a business, or a nation defaults on a debt obligation. This recourse, however varies on the type of security involved.

For example, when a borrower defaults in mortgage, it can result in foreclosure to reclaim the dues. In a secured loan, the lender can satisfy the loan as it has a legal claim on the asset.

Defaulting on Unsecured Debt

A default may also occur for unsecured debt such as credit card debts or medical bills. Though with unsecured debt, no assets are securing the debt, but still the lender has legal recourse in the case of default. If the credit card companies receives no payments after six months or more, the account would get charged off. This means a loss on the account would be taken by the lender. The bank may sell the charged-off account to a collection agency and in that case, the borrower needs to repay the agency. If the collection agency gets no money, then a legal action might be taken in the form of a lien or judgment placed on the borrower's assets. If the borrower fail to fulfil their contractual obligations, then a judgment lien is a court ruling that gives the right to the creditors to take possession of borrowers property.

Defaulting on Futures Contract

When one party fails to fulfil the obligations set forth by the agreement, defaulting on a futures contract occurs. Here, defaulting involves the failure to settle the contract by a required date. For transaction on a particular commodity or asset, futures contract are done for a legal agreement. While, one side of the contract agrees to buy a particular commodity or asset at a specific date and price, the other party agrees to sell as per the specified contract.