Abstract Based on a sample of 124 developing countries over the period 1980–2016, we find that default increases inequality. This result, which passes a series of robustness tests, is sensitive to the size of the debt in default, the duration of the default episode, the institutional quality, the level of development, and the type of default (on external or domestic debt) and may persist until 5 years after the end of the default episode. Besides, the declines in redistributive capacity characterized by lower taxes and subsidies and social spending are identified as channels through which default increases inequality in default countries vis-à-vis nondefault countries. Finally, additional results show that default also raises wealth inequality.