Event Of Default
You borrow $100,000 to upgrade the smoothie machines you have in your smoothie shop (the new Squishmatic 5000 can really churn). The loan agreement includes an event of default clause, which outlines certain situations where the lender can demand that the full amount get paid back immediately. One of the events listed is a buyout from a competitor.
Within a couple weeks, you decide the smoothie business isn't for you, and you make a deal to sell out to Juice Heaven down the street. That triggers the event of default. You now owe the lender the full repayment of $100,000, or they have the right to claim the collateral you put up (in this case, the Squishmatic 5000s that you bought with the money).
You don't really worry about it too much, since the whole situation is really Juice Heaven's problem now. They work it out with the lender, paying them back for the Squishmatic loan, and you're free to live the rest of your life without the threat of default events hanging over your head.
Related or Semi-related Video
Finance: What is Bankruptcy?260 Views
Finance a la' Shmoop what is bankruptcy well in the old days
this was bankruptcy you'd go to prison if you couldn't pay your bills and [People in prison for bankruptcy]
unfortunately there weren't and still aren't a lot of legal high wage earning
opportunities in prison working your way out of debt on the chain gang wasn't [Prisoners working outside]
really a thing back then so instead the burden would be on your family to pay
back the loan you'd promised to pay back and didn't ugly situation it paved the [Officer knocking on a prisoners family member to pay their debts]
way for some well today bankruptcy has a range of flavors that it comes in but
basically it exists as a legal vehicle to avoid the aforementioned situation a [Bankruptcy van driving]
bankrupt person and/or corporation stands in front of a judge they turn
their pockets inside out with a sad face and the judge then decide who will be [Person opens their pockets inside out in front of a judge]
paid when and how much well how does she decide the order for who gets paid back
when? well, it usually prioritizes employees and vendors owed a paycheck
above banks who have made a loan and under that umbrella all different types
of loans have different priorities if the bankrupt individual owns a home it's [bankrupt individual in his home on the toilet reading a newspaper]
usually sold out from under him and anything left after paying off the
mortgage is used to pay others even if you do survive a bankruptcy your credit
is pretty much ruined who's going to want to loan you money once you've
proven that you're not good with being loaned money yeah if you've defaulted in [a really low credit score chart for a bankrupt individual]
the past on promises to pay people back why wouldn't you do the same thing again
well remember that twenty dollars you loaned your buddy Eric that he never [Person loaning 20 dollars to friend Eric
paid back well how eager are you going to be to hook him up with another twenty
especially since you'd only be feeding his betting on frog fighting habit yeah [Eric betting money on frog fighting]
not so much so long Eric you'll get the help you need!
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