Before we can get to loss realization, though, we have to go through the default process.

What is a default? Simply put, it is the failure to perform a requirement as contracted. If not cured, it becomes a continuing default and the longer it continues the more severe it becomes.  It may be easiest to think of it in two ways...monetary or performance default and technical or compliance default. Of the two, monetary default is clearly the most potentially damaging.   However, in many cases the monetary default is set up by the technical default. Fiscal performance targets aren't hit, loan agreement term covenants are violated, or other technical or compliance abrogations occur. These things happen for reasons almost all of which lead directly back to poor fiscal performance which is the first step toward ultimate monetary default and  possible loss.

How do creditors handle these defaults. There are many ways, but for now, it is safe to say that at minimum the warmth in the relationship will cool. The question becomes how rapidly and how far gone is the loan when cooling is complete.  

It is important to get to a resolution strategy established while the borrower still has some capacity to generate repayment. The importance of getting to a resolution fairly quickly  emphasizes the need of keeping all communications open, and to the degree possible, impersonal. Discussions should be confined to facts, and that is often easier said than done in a one-side-against-the-other atmosphere. Blame can frequently be placed on both sides of the dispute. Unwillingness to recognize that fact can impair the resolution process.

Defaulted loans can end by being very expensive for both sides. If a satisfactory resolution cannot be determined, litigation and bankruptcy can follow. In either case, the potential for loss to the creditor increases.