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Overview

Loan defaulting is the process of marking an uncollectible loan as DEFAULTED. When you default a loan, Agatabo automatically attempts to recover the outstanding balance from securities (borrower’s savings, guarantors’ savings, or collateral) and writes off any unrecovered amount as bad debt expense.
Important: This is a last resort after all collection efforts have failed. Exhaust all collection efforts before defaulting a loan.

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How Loan Defaulting Works

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Automatic Recovery Process

When you default a loan, the system automatically attempts recovery in this order: 1. Borrower’s Savings
  • Recovers from the borrower’s savings account
  • Limited to pledged savings security amount (if specified)
  • Limited to actual available balance
2. Collateral (if pledged)
  • If collateral securities exist, marks recovery as “pending”
  • Records the pledged collateral value
  • Note: If collateral exists, guarantor savings are NOT charged
  • Collateral recovery requires manual follow-up to convert to asset
3. Guarantors’ Savings (only if NO collateral)
  • For each guarantor:
    • Recovers from guarantor’s savings account
    • Limited to pledged guarantee amount
    • Limited to guarantor’s available balance
    • Respects blocked amounts (e.g., if guarantor has other loans)
4. Bad Debt Expense (Write-off)
  • Any remaining unrecovered amount
  • Posted as bad debt expense
  • Affects profit & loss statement

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What Gets Cleared

Defaulting clears all outstanding balances:
  • Outstanding Principal
  • Outstanding Interest
  • Outstanding Penalties

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When to Default a Loan

Consider defaulting when:
  • All collection efforts have failed (calls, visits, reminders)
  • Loan is severely delinquent (typically 90+ days)
  • Borrower has disappeared or is deceased with no estate
  • Cost of further collection exceeds potential recovery
  • Guarantors unable or unwilling to pay
  • Collateral insufficient or unavailable

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Before Defaulting a Loan

Pre-default checklist:
  • Document all collection attempts
  • Contact guarantors (if any) and request payment
  • Attempt to seize or value collateral
  • Apply appropriate penalties
  • Consider legal action if amount justifies cost
  • Get committee/board approval per policy
  • Verify borrower’s current situation
  • Confirm no partial payment possibility
  • Review securities attached to the loan

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Defaulting a Loan

1

Obtain approval

Board or loan committee must authorize (per your policy)
2

Navigate to loan details

Loans → Select the delinquent loan
3

Click 'Default Loan' button

Located in the top header (if you have permission)
4

Review loan information

Dialog shows:
  • Loan details (principal, rate, period)
  • Security details (all pledged securities)
  • Total security amount
5

Select defaulting date

Choose the date to post the default (max: today)
6

Confirm action

Click “Default Loan” button

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What Happens When You Default

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1. Recovery Attempts

The system automatically:
  • Debits borrower’s savings (up to pledged amount or full balance)
  • If collateral exists: marks collateral recovery as pending
  • If NO collateral: debits guarantors’ savings (up to pledged amounts)

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2. Journal Entry Created

Entry type: LOAN_DEFAULT Example entry (100,000 principal, 20,000 interest, 5,000 penalties outstanding):

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3. Loan Status Changes

  • Status updated to: DEFAULTED
  • Defaulted date recorded
  • Removed from active portfolio (portfolio outstanding decreases)

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4. Recovery Amounts Tracked

The system records:
  • Amount recovered from borrower
  • Amount recovered from each guarantor
  • Amount recovered from collateral (if any)
  • Whether collateral recovery is pending
  • Amount written off as bad debt

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5. Notifications Sent

  • Borrower notified of default (if notifications enabled)
  • Email/SMS with details about outstanding amounts and recoveries

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6. Audit Trail

  • Full audit log created
  • Records who defaulted the loan and when
  • Tracks all recovery amounts

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Understanding Collateral Recovery

If collateral was pledged: What happens:
  • Collateral recovery is marked as “pending”
  • Pledged collateral value is recorded as recovered
  • Guarantors’ savings are NOT charged
  • Flag set: collateralRecoveryPending: true
What you need to do:
  • Follow up manually to seize/sell the collateral
  • Create collateral asset record (if configured)
  • Document the recovery process
Important: The system does NOT automatically create collateral assets. If collateral exists, guarantors are skipped, and you must manually follow up to recover the collateral value.

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Undoing a Default

Despite the warning in the UI, loan defaults can be reversed:
1

Navigate to loan details

Find the defaulted loan
2

Click 'Undo Default' button

Located in the top header (if loan is DEFAULTED)
3

Confirm

Confirm you want to reverse the default
What happens:
  • Reverses the default journal entry
  • Loan status changes back to ACTIVE
  • Outstanding balances are restored
  • Recovered amounts are returned to savings accounts
Cannot undo if:
  • Active collateral assets are linked to this loan (must reverse/delete those first)
  • Later loan events exist after the default date
Use case: Undo default if you discover the member is able to make payments, or if the default was recorded in error.

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After Defaulting

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Accounting Impact

  • Loan Receivable: Removed from balance sheet assets
  • Bad Debt Expense: Appears on profit & loss statement
  • Borrower/Guarantor Savings: Reduced by recovered amounts
  • Portfolio Outstanding: Decreased by loan amount

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Member Impact

  • Loan appears as “DEFAULTED” in member’s record
  • Member may be ineligible for future loans (per your policy)
  • Credit history negatively affected
  • Savings balance reduced by recovery amount
  • Default is an accounting action, not legal forgiveness
  • Organization can still pursue collections legally
  • Member still legally owes the debt
  • Consult legal counsel for collection options

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Recovery After Default

If the member later makes a payment:
  • Record as recovery income (not a loan payment)
  • Use manual journal entry or income recording feature
  • Document the recovery clearly

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Financial Reporting

Defaulted loans appear in: Profit & Loss:
  • Bad Debt Expense (amount written off)
Balance Sheet:
  • Reduced Loan Receivable (asset decrease)
Loan Analytics:
  • Status distribution (shows defaulted count)
  • Loan Book Snapshot (defaulted category)
Audit Reports:
  • Complete default transaction history
  • Recovery amounts by source

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Example Scenarios

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Full Recovery from Borrower

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Partial Recovery with Write-off

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Collateral Recovery Pending

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Best Practices

Defaulting tips:
  • Only default as last resort after exhausting all collection efforts
  • Document all collection attempts before defaulting
  • Get board/committee approval per policy
  • Review securities carefully before defaulting
  • If collateral exists, prepare to follow up on seizure/sale
  • Consider member’s circumstances (hardship vs. intentional default)
  • Maintain consistent defaulting criteria across all loans
  • Track default patterns to improve credit assessment
  • Use defaults as learning opportunity to strengthen lending practices

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Permissions Required

Organization Setting: Loan defaulting can be disabled organization-wide via disable_loan_defaulting setting in loan settings.

Applying Penalties

Try penalties before defaulting

Viewing Loan Details

Check loan status and arrears

Loan Analytics

Monitor portfolio at risk

Recording Payments

Record recovery payments