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Defaulting a loan is the formal accounting action you take when all reasonable collection efforts have failed and the loan is no longer expected to be repaid. When you default a loan in Agatabo, the system automatically attempts to recover the outstanding balance from the borrower’s savings, any collateral, and guarantor savings — in that order — and writes off any amount it cannot recover as bad debt expense. This keeps your books accurate, removes the uncollectible amount from your active portfolio, and creates a complete audit trail of the recovery process.
Default is a serious financial action and should be a last resort. It reduces member savings balances, creates a bad debt expense, and permanently changes the loan status. Exhaust all collection options — payment reminders, penalty application, guarantor contact, and collateral assessment — before proceeding. If you default a loan in error, you can undo it, but only if no collateral assets have been created and no events have been posted after the default date.

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What Default Means

Defaulting a loan in Agatabo does not forgive the legal debt — the borrower still owes the money under the terms of your loan agreement. It is an accounting action that:
  • Removes the loan from the active portfolio (Portfolio Outstanding decreases)
  • Posts a recovery entry that collects whatever is available from securities
  • Writes off any unrecovered balance as bad debt expense
  • Changes the loan status to DEFAULTED
  • Releases all security blocks on guarantors and borrower savings
Your organization retains the legal right to continue collection efforts after a default. If the borrower later makes a payment, record it as recovery income using a manual journal entry.

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When to Default a Loan

Consider defaulting when all of the following are true:
  • The loan is severely delinquent — typically 90 or more days past due.
  • You have documented all collection attempts (calls, visits, written notices).
  • You have contacted guarantors and they are unable or unwilling to pay.
  • Collateral has been assessed and either sold or determined to be unrecoverable.
  • The cost of further legal collection exceeds the likely recovery amount.
  • You have board or committee approval per your organization’s policy.
Pre-default checklist:
  • All collection attempts documented
  • Guarantors contacted and response recorded
  • Collateral assessed and value confirmed
  • Penalties applied up to date
  • Board or committee approval obtained
  • All securities reviewed for recovery potential

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The Defaulting Process

1

Obtain committee or board approval

Follow your organization’s policy for authorizing a default. Record the approval in your meeting minutes before proceeding in Agatabo.
2

Open the loan detail page

Go to Loans and click the delinquent loan row to open its detail page.
3

Click Default Loan

The Default Loan button appears in the page header. It is visible only if you hold the loans:approve permission and loan defaulting is not disabled in your organization settings.
4

Review the default summary

The dialog displays the loan details, all attached securities and their values, and the total security coverage. Verify this information matches your records.
5

Select the default date

Choose the date to post the default entry. The date cannot be in the future. Use the actual date the committee approved the default.
6

Confirm

Click Default Loan to confirm. The system executes the automatic recovery hierarchy immediately.

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What Happens Automatically

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1. Recovery Hierarchy Executes

Agatabo attempts recovery in this fixed order: Step 1 — Borrower’s savings: The system debits the borrower’s savings account up to the pledged savings lien amount (or up to the full available balance if no specific lien was set). Step 2 — Collateral (if present): If any collateral security is attached to the loan, the system marks collateral recovery as pending and records the pledged collateral value as recovered. Guarantors are skipped entirely when collateral exists. Your team must follow up manually to physically seize or sell the asset. Step 3 — Guarantors’ savings (only if no collateral): For each guarantor, Agatabo debits their savings account up to their pledged guarantee amount, capped at their actual available balance. Step 4 — Bad debt write-off: Any outstanding balance not covered by the recovery steps above is posted as bad debt expense.

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2. Journal Entry Created

Entry type: LOAN_DEFAULT Example — 100,000 RWF principal + 20,000 RWF interest + 5,000 RWF penalties outstanding, partially secured: 
Dr  Borrower Savings                50,000    (recovered from borrower)
Dr  Guarantor A — Savings           30,000    (recovered from guarantor)
Dr  Bad Debt Expense                45,000    (unrecovered — written off)
    Cr  Loan Receivable                        100,000    (principal cleared)
    Cr  Interest Receivable                     20,000    (interest cleared)
    Cr  Penalty Receivable                       5,000    (penalties cleared)

Total Debits = 125,000   |   Total Credits = 125,000

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3. Loan Status Changes

The loan status changes from ACTIVE to DEFAULTED. The defaulted date is recorded. The loan is removed from the active portfolio — Portfolio Outstanding decreases by the outstanding principal balance.

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4. Recovery Amounts Tracked

Agatabo stores a detailed recovery record showing:
  • Amount recovered from the borrower’s savings
  • Amount recovered from each guarantor, individually
  • Collateral recovery amount (if applicable) and pending status
  • Total amount written off as bad debt

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5. Notifications Sent

If notifications are enabled, the borrower receives an SMS or email explaining the default and the recovery amounts deducted from their savings.

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6. Audit Trail Created

A complete audit log entry records who initiated the default, when it was posted, and all recovery amounts — providing a permanent record for your committee and any future audit.

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Undoing a Default

If you defaulted a loan in error, or if the borrower has come forward with funds after the default was posted, you can reverse it.
1

Open the defaulted loan

Find the loan in the Loans list (filter by status: Defaulted) and click to open it.
2

Click Undo Default

The Undo Default button appears in the page header for defaulted loans (requires loans:approve permission).
3

Confirm the reversal

Confirm the action. Agatabo reverses the default journal entry, restores all recovered amounts to the relevant savings accounts, and changes the loan status back to ACTIVE.
You cannot undo a default if:
  • Active collateral asset records linked to this loan exist (reverse or delete those first).
  • Any loan events — payments, penalties, or modifications — have been posted after the default date.

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Financial Impact

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Profit & Loss

Bad debt written off appears as Bad Debt Expense on your Profit & Loss statement. This reduces net income and, ultimately, the dividends available for distribution. Track this figure over time — a rising bad debt expense indicates the credit approval or collection process needs tightening.

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Balance Sheet

  • Loan Receivable (asset) decreases by the written-off principal.
  • Member Savings (liability) decreases by the amounts recovered from borrower and guarantor savings.

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Loan Analytics

Defaulted loans appear in the Loan Book Snapshot table under the Defaulted category. They are excluded from Portfolio Outstanding but remain visible in the historical analytics for audit and reporting purposes.

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Example Scenarios

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Scenario 1: Full Recovery from Securities

Outstanding:             260,000 RWF (200,000 principal + 60,000 interest)
Borrower's savings lien: 260,000 RWF pledged

Recovery:
  Step 1 — Borrower savings: 260,000 RWF recovered
  Bad debt write-off:          0 RWF

Result: Loan fully recovered. No bad debt expense. Borrower's savings
        balance reduced by 260,000 RWF.

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Scenario 2: Partial Recovery with Write-Off

Outstanding:             620,000 RWF (500,000 principal + 100,000 interest + 20,000 penalties)
Borrower savings:        100,000 RWF available
Guarantor A pledged:     200,000 RWF (available: 150,000)
Guarantor B pledged:     200,000 RWF (available: 250,000)
No collateral.

Recovery:
  Step 1 — Borrower savings:  100,000 RWF
  Step 3 — Guarantor A:       150,000 RWF (capped at available, not pledge)
  Step 3 — Guarantor B:       200,000 RWF (capped at pledge amount)
  Total recovered:            450,000 RWF
  Bad debt write-off:         170,000 RWF

Result: 73% recovered, 170,000 RWF posted as bad debt expense.

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Scenario 3: Collateral Recovery Pending

Outstanding:             1,200,000 RWF (1,000,000 principal + 200,000 interest)
Borrower savings:           50,000 RWF available
Collateral:              Land title, estimated value 1,500,000 RWF
Guarantor pledged:         300,000 RWF

Recovery:
  Step 1 — Borrower savings:  50,000 RWF
  Step 2 — Collateral:     1,150,000 RWF (pending — manual follow-up required)
  Guarantors:                   0 RWF (skipped because collateral exists)
  Bad debt write-off:           0 RWF

Result: Collateral recovery pending. Guarantor savings untouched.
        Your team must follow up to seize and sell the land.
After defaulting a loan with collateral pending, assign a specific team member to manage the asset recovery process. Create a task with a target completion date, and record progress notes in your committee minutes. The faster you convert collateral to cash, the less it affects your organization’s liquidity.