A notice of default is a formal notification that a debtor has failed to make payments on an outstanding debt according to the terms and conditions found in the contract between the debtor and the lender. The exact text of the document may vary, depending on the intentions of the lender. In many countries around the world, it is necessary for the lender to record this notice to the delinquent borrower with local authorities before it is possible to begin foreclosure proceedings.
In some cases, the notice of default serves as a reminder that the debtor is in arrears, and extends a grace period in which it is possible to avoid legal action by paying the amount that is past due. Often, some type of penalties or additional interest is applied to the past due amount. Those additional costs are also considered due by the end of the grace period, or the account will not be considered up to date, and will still be in default.
When preliminary notices go unanswered, it is not unusual for the notice of default to remind the debtor of the courses of action open to the lender. This can include taking legal action to recover the lender’s investment, sending the account to a collection agency, or whatever other processes are allowed under the laws of the jurisdiction. Generally, when the lender chooses to sue for damages, the courts will move quickly, often awarding a judgment in favor of the plaintiff. Shortly thereafter, the property is sold, any outstanding court costs settled, and the remainder of the proceeds from the sale are forwarded to the lender.
Since the costs associated with going to court after filing a notice of default may be somewhat extensive, many lenders will make every attempt to work out some sort of alternative arrangements with the debtor. These include the voluntary surrender of the property to the lender after receiving the notice of default, making it possible for the lender to sell the property, settle the outstanding mortgage, and possibly cover at least a portion of the administrative costs associated with attempting to recover the lost revenue from the defaulted mortgage. Even with situations where the debtor voluntarily gives up all claims to the property, there is usually some type of legal process that must be followed. Since civil law related to foreclosures and repossessions vary greatly from one nation to another, it is important to engage legal counsel that is well-versed in the laws that apply to the specific situation.
