What is a Debtor, Debtor vs Creditor and Debtor Definition FAQs

Anbarasan Appavu

A debtor is a business or an individual person who owes money. If the debt is in the form of a loan from a financial institution, the debtor is a borrower; if the debt is in the form of securities, such as bonds, the debtor is an issuer. Legally, an individual who voluntarily files for bankruptcy is also considered a debtor.

What is a Debtor, Debtor vs Creditor and Debtor Definition FAQs

• Debtors are those who owe money, whether to banks or other individuals.

• Debtors are commonly referred to as borrowers if they owe money to a bank or financial institution; however, they are referred to as issuers if the debt is in the form of securities. Debtors cannot be imprisoned for nonpayment of consumer debt (e.g. credit cards).

•The Fair Debt Collection Practices Act (FDCPA) prohibits bill collectors from threatening debtors with the jail time, but courts could indeed send debtors to jail for unpaid taxes or child support. • Creditors may have additional recourse if they have collateral, such as repossession, or they might take debtors to court for garnishments.

Understanding Debtors

It is not illegal to not pay a debt. Except in certain bankruptcies, debtors are free to prioritize their debt repayments as they see fit. However, if they fail to adhere to the terms of their debt, they may be subject to fees, penalties, and a reduction in their credit scores. Additionally, the creditor may file a lawsuit against the debtor. This could result in liens and encumbrances.

A court can send a debtor to jail for unpaid child support or taxes, but not for consumer debts.

Debtor vs. Creditor

Creditors are diametrically opposed to debtors. Credit is made available to debtors by creditors. Like debtors, creditors can be either a person or an entity. Creditors can also be companies that supply goods. If a business provides goods or services and accepts payment at a later date, they are acting as a creditor.

Additionally, if they have lent money, family and friends can be considered creditors. Real creditors are banks or financial institutions with a legally binding agreement. Creditors profit from debtors by charging interest or fees.

Can Debtors Be Sentenced to Prison for Unpaid Debts?

Prior to the Civil War, debtors' prisons were relatively common in the United States; however, most states began phasing them out. Credit card debt and medical bills which are not considered as consumer debt are not punishable by imprisonment in modern times. The Fair Debt Collection Practices Act (FDCPA), which regulates debt collection practices, prohibits bill collectors from threatening debtors with jail time. However, courts can send debtors to jail for unpaid child support and taxes.

There are occasional exceptions to this rule. In some states, for instance, if a debtor has been ordered by the court to pay off a debt and misses a payment, they are held in contempt of court. Being in contempt of court can result in jail time, thus sending the debtor to jail indirectly.

What laws safeguard debtors?

The FDCPA is a consumer protection statute intended to safeguard debtors. This law specifies when, where, and how often debt collectors may contact debtors. It also emphasizes the debtor's right to privacy and other rights. This law applies only to third-party debt collectors, such as companies attempting to collect debts on behalf of other businesses or individuals.

What Options Does a Creditor Have If a Debtor Does Not Pay?

If a debtor fails to pay, creditors have options for collecting the debt. If the debt is secured by collateral, such as mortgages and auto loans secured by homes and vehicles, the creditor may attempt to reclaim the collateral. In other instances, the creditor may file a lawsuit against the debtor in an effort to garnish the debtor's wages or obtain another type of repayment order.

Example of a Debtor

Consider Adam, who is seeking a mortgage in order to purchase a home. She collaborates with a bank to secure financing for a property. Her loan amount is $500,000.

Adam is currently $500,000 in debt to the bank (making her a debtor). Her bank is owed money. The home (in this case, Adam's home) serves as collateral for a mortgage loan.

If Adam defaults on the loan, the bank may seize and sell the property to recoup the amount owed.

Debtor Definition FAQs

What Does It Mean to Be a Debtor?

Debtors are people or organizations that owe money. Debtors may owe money to banks, as well as to individuals and businesses. A debt that must be paid in the future is owed by debtors.

Who Are the Debtors and Creditors?

Both debtors and creditors can be individuals or organizations. Individuals and businesses are typically debtors who borrow money from banks and other financial institutions. Creditors, who can be any individual or business, are commonly associated with banks.

Is the Customer a Creditor or Debtor?

If a bank customer has a loan or owes the bank money, they are a debtor. Customers who purchase goods or services and make immediate payment are not debtors. Customers of companies that provide goods or services can become debtors, however, if they are permitted to pay at a later date.

Is a Debtor an Asset?

A debtor is an individual or a business. The money owed to the creditor by the debtor is considered an asset by the creditor. Money owed by a debtor can be an account receivable (for goods or services purchased on credit) or a note receivable if the debt is a loan.

Are Debtor Income Sources?

Debtors do not count as income. The money owed by debtors (to creditors) is not recorded as income, but as an asset, such as a promissory note or an account receivable. However, any interest or fees charged by the creditor are recorded as income for the creditor and as a liability for the debtor.

The Bottom Line

The debtors owe money to individuals and businesses (such as banks). If the debt is from a bank or financial institution, the debtors are referred to as borrowers. Debtors can be either individuals or businesses. Debtors can also include those who voluntarily file for bankruptcy protection. Unpaid consumer debts do not result in incarceration. Courts can put debtors in jail for unpaid child support or taxes, but debt collectors cannot threaten debtors with imprisonment.


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