What Is a Debtor?
A debtor is a company or individual who owes money. If the debt is in the form of a loan from a financial institution, the debtor is referred to as a borrower, and if the debt is in the form of securities—such as bonds—the debtor is referred to as an issuer. Legally, someone who files a voluntary petition to declare bankruptcy is also considered a debtor.
Key Takeaways
- Debtors are individuals or businesses that owe money, whether to banks or other individuals.
- Debtors are often called borrowers if the money owed is to a bank or financial institution, however, they are called issuers if the debt is in the form of securities.
- Debtors cannot go to jail for not paying consumer debt (e.g. credit cards).
- The Fair Debt Collection Practices Act (FDCPA) prevents bill collectors from threatening debtors with jail time, but courts can send debtors to jail for unpaid taxes or child support.
- Creditors may have other recourse if there’s collateral, such as repossession, or they can take debtors to court for garnishments.
Understanding Debtors
It is not a crime to fail to pay a debt. Except in certain bankruptcy situations, debtors can prioritize their debt repayments as they like, but if they fail to honor the terms of their debt, they may face fees and penalties as well as a drop in their credit scores. Additionally, the creditor may take the debtor to court over the matter. This may lead to liens or encumbrances.
Debtors cannot be sent to jail for unpaid consumer debts, but a court can send a debtor to jail for unpaid child support or taxes.
Debtor vs. Creditor
Creditors are the opposite of debtors. Creditors are the ones that extend credit to debtors. Creditors, like debtors, can be a person or entity. Creditors can also be companies that provide supplies. In the case that a company offers supplies or services and will accept payment at a later time, they are acting as a creditor.
As well, family or friends can also be considered creditors if they’ve lent money, considered a personal creditor. Real creditors are banks or finance companies with a legal contract. Creditors make money off debtors by charging fees or interest.
Can Debtors Go to Jail for Unpaid Debts?
In the U.S., debtors' prisons were relatively common until the Civil War era, at which time most states started phasing them out. In contemporary times, debtors do not go to jail for unpaid consumer debt such as credit cards or medical bills. The set of laws governing debt practices activities, known as the Fair Debt Collection Practices Act (FDCPA), forbids bill collectors from threatening debtors with jail time. However, the courts can send debtors to jail for unpaid taxes or child support.
In some cases, there are exceptions to this rule. For example, in some states, if a debtor has been ordered by the court to pay a debt and misses a payment, they are held in contempt of court, and being in contempt of court can result in jail time, thus indirectly sending the person to jail for being a debtor.
What Laws Protect Debtors?
The FDCPA is a consumer protection law, designed to protect debtors. This act outlines when bill collectors can call debtors, where they can call them, and how often they can call them. It also emphasizes elements related to the debtor's privacy and other rights. However, this law only pertains to third-party debt collection agencies, such as companies trying to collect debts on behalf of other companies or individuals.
What Can a Creditor Do If a Debtor Doesn't Pay?
If a debtor fails to pay a debt, creditors have some recourse to collect it. If the debt is backed by collateral, such as mortgages and car loans backed by houses and cars, the creditor can attempt to repossess the collateral. In other cases, the creditor may take the debtor to court in an attempt to have the debtor's wages garnished or to secure another type of repayment order.
Example of a Debtor
For example, consider Sally, looking to take out a mortgage to buy a home. She works with a bank to finance a property. Her loan is for $250,000.
Sally now owes the bank $250,000 and is in debt to them (making her a debtor). Her bank is the creditor. With mortgages, the home (in this case Sally's home) is used as collateral for the loan.
If Sally defaults on the loan the bank can take possession of the property and sell it to recoup their money owed.
Debtor Definition FAQs
What Does Debtor Mean?
Debtors are individuals or businesses that owe money. Debtors can owe money to banks, or individuals and companies. Debtors owe a debt that must be paid at some time in the future.
Who Is a Debtor and Who Is a Creditor?
Debtors and creditors can be individuals or businesses. For the most part, individuals and companies are debtors who borrow money from banks or other financial institutions. Creditors, which can be any individual or company, are often thought of as banks.
Is a Customer a Creditor or Debtor?
Bank customers are debtors if they have a loan or owe the bank. Customers that buy goods or services and pay on the spot are not debtors. However, customers of companies that provide goods or services can be debtors if they are allowed to make payment at a later date.
Is a Debtor an Asset?
A debtor is a person or business. For the creditor, the money owed to them (by a debtor) is considered an asset. In some cases, money owed by a debtor can be an account receivable (for goods or services bought on credit) or note receivable if it's a loan.
Are Debtors an Income?
Debtors are not considered income. The money owed by debtors (to creditors) is not recorded as income, but rather an asset, such as note or account receivable. Any interest or fees charged by the creditor, however, is recorded as income for the creditor and an expense for the debtor.
The Bottom Line
Debtors owe money to individuals or companies (such as banks). Debtors can be individuals or companies and are referred to as borrowers if the debt is from a bank or financial institution. Debtors can also be someone who files a voluntary petition to declare bankruptcy. Debtors cannot go to jail for unpaid consumer debts. Debt collectors cannot threaten debtors with jail time, but courts can put debtors in jail for unpaid child support or taxes.