Who is a Debtor?
A debtor is a person or entity that owes money. This debt could originate from a loan taken from a bank or a financial institution, making the debtor a borrower. If the debt is related to issuing securities, such as bonds, the debtor is referred to as an issuer. In legal terms, anyone who voluntarily files for bankruptcy also falls under the category of a debtor.
Key Takeaways
- Debtors may be individuals or companies who owe money to banks or other entities.
- Borrowers owe money to financial institutions, while issuers owe through securities.
- Individuals cannot be jailed for failing to repay consumer debt, such as credit card debt.
- The Fair Debt Collection Practices Act (FDCPA) prohibits threatening debtors with imprisonment for failing to repay consumer debt.
- In the case of unpaid taxes or child support, a debtor may still face jail time.
- Creditors may take action such as repossession or legal measures like garnishment if there is collateral.
Understanding Debtors
It’s not a criminal act to be unable to repay a debt. Outside the scope of bankruptcy, debtors can manage their repayment priorities freely. However, neglected debts can attract fees and penalties, damaging one’s credit score. Consequences may also extend to legal actions resulting in liens or encumbrances.
Debtor vs. Creditor
Creditors are entities or individuals extending credit; they are the counterpart to debtors. Anyone offering supplies or services expecting future payment also classifies as a creditor. This could include family members, friends, or more formal institutions like banks and finance companies. Creditors earn money by charging fees or interest to debtors.
Can Debtors Go to Jail for Unpaid Debts?
Historically, debtors’ prisons existed until around the Civil War era. Today, individuals are not imprisoned for failing to repay consumer debts like credit cards or medical bills. The Fair Debt Collection Practices Act (FDCPA) ensures that debtors can’t be threatened with imprisonment. However, jail time is possible for unpaid taxes or child support. In some cases, if a court order to pay a debt is ignored, contempt of court could indirectly lead to jail time.
What Laws Protect Debtors?
Debtors are protected under various laws, including the FDCPA, which controls when, where, how often, and under what conditions bill collectors can contact debtors. This act mostly impacts third-party debt collectors, not original creditors.
What Can Creditors Do If a Debtor Doesn’t Pay?
Creditors have multiple options for recovering unpaid debts. If the debt ties back to collateral, like a mortgage or car loan, creditors may reclaim the collateral. Alternatively, they can take legal steps to garnish wages or court-ordered repayments.
Example of a Debtor
Consider Sally, who takes out a mortgage worth $250,000 to buy a house. Here, Sally becomes a debtor owing this sum to a bank, which acts as the creditor. The house serves as collateral. If Sally fails to pay her mortgage, the bank has the right to take possession of the property to recover the owed amount.
Debtor Definition FAQs
What Does Debtor Mean?
Debtors are entities (individuals or businesses) that owe money, which must be repaid in the future.
Who Is a Debtor and Who Is a Creditor?
Debtors and creditors could be either individuals or businesses. Traditionally, debtors owe money borrowed from financial entities, and creditors lend money.
Is a Customer a Creditor or Debtor?
Bank customers with outstanding loans are considered debtors. Customers purchasing items paid on the spot are not debtors, while those allowed to pay at a later date become debtors.
Is a Debtor an Asset?
For creditors, money owed by debtors is viewed as an asset, classified under accounts or notes receivable.
Are Debtors an Income?
Money owed by debtors to creditors is an asset, not income. Interest fees accrued are recorded as income for the creditor.
The Bottom Line
Debtors owe money to creditors, who can be individuals or entities like banks. Debtors can take the form of borrowers from financial institutions or entities that filed for bankruptcy. While consumer debt often doesn’t result in jail time, non-payment of taxes or child support can follow different legal repercussions.
Related Terms: Creditors, Bankruptcy, Collateral, Consumer Debt, Interest Rates.
References
- Federal Trade Commission. “Fair Debt Collection Practices Act”.
