A default in the bankruptcy process occurs in a repayment or reorganization plan when a debtor fails to make a timely payment to a trustee or creditor. If a filing debtor does not resolve the default in a timely manner, the bankruptcy can be dismissed by the bankruptcy judge or an appeal may be made by a bankruptcy trustee to convert the bankruptcy into another type of bankruptcy.
Defaults most frequently occur in a Chapter 13 bankruptcy when the filer is unable to keep up with Chapter 13 payments and defaults. Under some conditions, the trustee can then request the Chapter 13 bankruptcy be converted to a Chapter 7. If this occurs, the debtor may lose some of their non-exempt assets to liquidation.
In conventional terms, a default can occur when a debtor fails to make a timely payment to a creditor when there is a contract of obligation. Contractual defaults often initiate legal events that can make a debt fully due after the default occurs. These contractual obligations occur for all loans, secured or unsecured. The most commonly recognized defaults are those for secured loans because default leads to foreclosure and repossession.
Many contracts also have a bankruptcy clause that states if a debtor files bankruptcy, he or she is in default of the contract. If a clause exists, it does not matter whether or not the debtor is current on their payments the creditor can demand payment in full the moment the debtor files for bankruptcy protection. This action, however, may have to wait until the automatic stay is complete or the creditor asks a bankruptcy court for relief of the automatic stay by showing cause.
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