> ## Documentation Index
> Fetch the complete documentation index at: https://docs.shores.finance/llms.txt
> Use this file to discover all available pages before exploring further.

# Defaults and impairments

> What happens to depositors when a loan is late or defaults.

## Late payments

When a borrower misses a payment, the servicer works with the borrower toward a cure. \[TBD: when a loan is classed as late]

## Impairment

If full repayment is in doubt, the loan can be impaired: its carrying value in NAV is written down to reflect the expected recovery. \[TBD: impairment policy]

## Default and enforcement

If a default is not cured, the first lien may be enforced under local law and the property sold to repay the loan. Enforcement takes time and costs money, and recoveries can be less than the amount owed. \[TBD: enforcement process]

## How losses are absorbed

1. **Recovery** from the borrower and the property.
2. **First-loss reserve.** Part of protocol fees builds a reserve inside the vault that absorbs losses first.
3. **NAV.** Losses beyond the reserve reduce NAV, so they are shared by all shUSD holders in that vault.

Each vault is a separate cell, so a loss in one vault does not affect another.

## Reporting

Defaults and impairments are reported in the [Monthly updates](/depositors/monthly-updates). \[TBD: interim notice policy for material events]


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