Definition of default

Would you consider a customer's death as a default for a loan?

Thanks.

Typically yes, but it is a matter of the loan contract and you need to consider successor in interest on mortgage loans.

What if it's a unsecured line of credit that is tied to their checking account? Right now, we have the checking account froze since it's a single owner and we removed the auto draft for that person's LOC. Our thought process is that once the LOC goes into default, we can execute our right of setoff from the checking account to pay off the LOC.

Before taking this action, I suggest you consult with bank counsel. Your deposit contract including setoff rights may die with the account owner and the funds in the checking account now belong to the estate. Depending on state probate laws you will likely have to file a claim against the estate the same as all of the other creditors.

As indicated, you need to read your contracts.

Plus, if you issued a debit card on the checking account - exercising a right offset is prohibited under 1026.12(c) anyway.

It's always cheaper to do it right the first time. As everyone else advises--read your contract. Then, include your preliminary decision in a request for counsel's review. In cases like this, the cost of your attorney's time is money well spent.