Defaulted Interest

Defaulted Interest means (see more about entries related to interest in the U.S. here)

interest that has not been paid on time. The fact that a debtor has failed to make timely payments of interest and principal as they come due does not transform the unpaid interest into principal for determining the tax consequences of later payments. For federal tax purposes, payments on defaulted debt in excess of current interest are applied against defaulted (unpaid) interest, not to reduction of principal. When a noteholder transfers a defaulted interest-bearing obligation, he or she may not be taxed on the interest that accrued up to the time of the transfer if the debt and the defaulted interest are uncollectable.