If you are a lender and you don't want to find yourself in hot water, do your research before extending credit to just anybody. You must definitely find out about the debtor. Banks normally use the 5C's in lending, which are: character, capital, cashflow, capacity, collateral.

Character pertains to the willingness (and diligence!) to pay the loan. Capital shows the credit worthiness of a company or an individual who is applying for a loan. It refers to the funds used to compensate unavoidable losses. Cashflow pertains to the liquidity of the company. Having capital is a good thing, but having cash is best! Capacity refers to the company's ability to create money to pay for the loan. Collateral is kinda self-explanatory. It is an asset tied to the loan for security (like a house for a mortgage).

Loan default is a multi-faceted problem. I think that one of the reasons why many individuals defaulted on loans and mortgages is because lenders/creditors have failed to give strict criteria regarding loan applications and took too much risks. What happened was that everybody (even those with bad credit histories) was granted a loan, which shouldn't have been the case. Coupled with the bad economy, many lenders/creditors were "crippled". They became illiquid and owned so many non-earning assets (collaterals) that could not be sold because nobody would want to buy them. Just to be on the safe side (than be sorry!), lend wisely and think many times before you lend someone money and do your homework and make thorough character investigation!