A debtor is an individual or organization that owes money to a creditor. The term "debtor" is used to refer to someone who has taken out a loan from a financial institution or issued securities like bonds. Debtors can include individuals, businesses, banks, lending institutions, and other organizations.
Legally, a person who files for bankruptcy is also considered a debtor. A debtor's relationship with their creditor ends once the debt is paid off. For example, if a person obtains a loan from a bank, the bank is the creditor, and the person is the debtor. However, if that same person puts money into the bank, they become the creditor, and the bank becomes the debtor.
Laws to Safeguard Debtors
There are laws in place to safeguard debtors, such as the Fair Debt Collection Practices Act (FDCPA), which protects debtors from abusive collection practices. Debtors can be classified into two categories: short-term debtors and long-term debtors, depending on the repayment period of the debt.
Debtors by Types - Two categories of debtors exist.
Short-Term Debtor A debtor is referred to as short-term when the repayment period is brief (less than a year). On the balance sheet, this kind of debt is listed as short-term receivables under current assets.
Long-Term Debtor When a debt is granted for a lengthy period of time (more than a year), the debtor is well-known. On the balance sheet, this debt is listed as long-term receivables under long-term assets.
When should a debt be recorded?
There is no duty to report where there is a possibility but not a probability of a liability. This means that the person or entity to whom the event applies is not deemed a debtor until the responsibility becomes likely and the amount of the loss may be estimated.
When is a liability released?
A debtor's liability can be discharged in bankruptcy or with the permission of the counterparty. If the liability is no longer legitimate in either circumstance, the entity involved is no longer a debtor in connection to that liability.
In general, if you take out a loan, you owe the money to the lender. Typically, each debtor and creditor (supplier/lender) have a formal agreement that details the terms of payment, any discounts, etc.
Debt non payment is not a crime. With the exception of certain bankruptcy situations, debtors are free to prioritise their debt repayments however they see fit, but failing to adhere to their debt conditions can result in fines, penalties, and a drop in their credit score. In addition, the creditor has the option of presenting the debtor to the court.