# 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 %}

## Recovery Options

Even after default, the vault is not necessarily terminal:

* The Pool Manager can **propose renegotiation** from the Defaulted phase
* If approved, the vault returns to **Active** with recalculated terms
* This allows restructured repayment when the borrower's situation can be recovered

## Relevant Functions

| Function                                    | Caller  | Description                             |
| ------------------------------------------- | ------- | --------------------------------------- |
| `check_default()`                           | Anyone  | Trigger default if grace period expired |
| `apply_late_fee(caller)`                    | Manager | Apply late fee before default           |
| `propose_renegotiation(caller, rate, term)` | Manager | Propose restructured terms              |


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