> For the complete documentation index, see [llms.txt](https://docs.trilobyte.finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.trilobyte.finance/protocol-mechanics/vault-lifecycle/defaulted.md).

# Defaulted

The **Defaulted** phase is triggered when a borrower fails to make payments within the allowed grace period. Default has serious consequences for the Pool Manager.

## How Default Happens

1. The borrower misses a payment — the **next due date** passes
2. The Pool Manager may apply **late fees** (18% p.a. penalty)
3. The **grace period** countdown begins (default: 30 days)
4. If no payment is made before `next_due + grace_period`, anyone can call `check_default()`
5. The vault transitions to **Defaulted**

## What Happens on Default

When `check_default()` is called and the grace period has expired:

1. The vault phase transitions to **Defaulted**
2. The Pool Manager's **collateral is slashed** — transferred to a recovery address for investor protection
3. The manager is **marked delinquent** in the Globals contract (`mark_delinquent`)
4. The manager's **outstanding principal** is decremented in Globals
5. A `VaultDefaulted` event is emitted with the outstanding amount and missed payment count

## Consequences for the Manager

* **Collateral slashed** — The locked collateral for this vault is seized
* **Delinquency flag** — The manager is flagged as delinquent in Globals
* **Blocked from new vaults** — The Factory rejects vault creation for delinquent managers
* **Requires manual clearing** — Only an Operations Admin can call `clear_delinquency` after review

{% hint style="danger" %}
Default is the most severe outcome. Pool Managers have strong financial incentives to ensure borrower repayment — their own collateral is at stake.
{% endhint %}

## Default is terminal

Once a loan defaults, the phase is **terminal** — it cannot be renegotiated or returned to Active:

* The Pool Manager's staked **collateral is slashed** to compensate investors.
* The manager is marked **delinquent** in Globals, which blocks them from originating new loans until cleared.
* Restructuring is only possible **before** default — see [Renegotiation](/protocol-mechanics/vault-lifecycle/renegotiation.md), which is reachable from the Active phase only.

## Relevant Functions

| Function          | Caller | Description                                                                                                  |
| ----------------- | ------ | ------------------------------------------------------------------------------------------------------------ |
| `check_default()` | Anyone | Trigger default once the grace period has expired (slashes manager collateral, marks the manager delinquent) |