Key takeaways

  • A debtor or borrower is a person or organization that borrows money from a financial institution, usually tied to a loan or credit card.
  • The Fair Debt Collection Practices Act protects debtors from deceptive or harmful debt collection practices.
  • While the term debtor can have a bad reputation, it does not mean you are at risk
  • instead, you simply owe money to another person or institution.

Debtors are individuals or companies who borrow money from banks, credit unions or other financial institutions. The money owed is usually tied to a loan or credit card the debtor or borrower gets from their financial institution.

What is a debtor?

A debtor is a person or business that owes money to another person or business. For example, if you take out a car loan from your credit union, you’re the debtor and the credit union is the creditor in this transaction. Sometimes, a debtor refers to someone who files for bankruptcy.

A borrower and debtor are nearly interchangeable terms. A borrower is in debt to a lender or financial institution when they borrow money. They usually complete applications and have legal obligations when borrowing money — in other words, if you take out a loan, you have a contractual obligation to pay it back.

Example of a debtor

Debtors aren’t always individuals, but in many cases, they are. Debtors are people or companies who have:
  • Auto loans.
  • Business credit cards.
  • Credit cards.
  • Mortgages.
  • Personal loans.
  • Small business loans.
  • Student loans.

Why it matters

If you are a debtor, you have certain financial responsibilities. The type and amount of debt you have can affect your credit score, so it’s important that you’re aware of which debt you currently hold and which strategies you can take to pay it off.

What is the difference between a debtor and a creditor?

While a debtor owes money to someone else, a creditor is a person or business they owe money to.

You may hear a borrower referred to a debtor, since they are someone who takes on debt. A lender — the entity that lends money to a person or a business — is the creditor. Creditor, lender and issuer are usually interchangeable terms.

What laws protect debtors?

There is nothing wrong with being a debtor — it is very common for people and companies to borrow money from other companies. They make payments according to their terms and many times repay their loan or credit card without cause for concern. But there are some instances where debtors can’t pay.

If you can’t pay your debt, it will eventually be deemed delinquent, and if you don’t pay long enough, you can default. Your debt can go into collections, typically somewhere around 180 days of nonpayment though this can vary. The process of your debt going to collections is when your creditor sells your old debt to a third-party company for less than you owe and the new company starts contacting you in an effort to collect the old debt.

While debt collection agencies may have already contacted you, you have protection against unlawful actions by these companies.

The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) is a consumer law designed to protect you from deceptive and abusive debt collection practices.

Under the FDCPA, debt collectors can’t contact you between 9 p.m. and 8 a.m., and they can’t contact you at work. But they can call, text and send emails or letters in an attempt to collect an outstanding debt. According to the law, they aren’t allowed to:

  • Use harmful or obscene language.
  • Threaten you with physical harm or jail time.
  • Lie about the debt you owe or what happens to you if you don’t pay your debt.

Statute of limitations

Debt collectors can continue attempting to collect debt on both unsecured and secured debt until you’ve paid your debt in full. However, the statute of limitations on old debt means they only have a certain number of years to sue you for that old debt.

If the debt is secured, you could also lose your collateral. For example, the lender could repossess your vehicle if you fall behind on payments. Another example is if your home could face foreclosure if you stop making mortgage payments. This usually happens after 120 days of non-payment on home loans.

The statute of limitations varies by state and by the debt in question. You could restart the clock on old debt if you acknowledge it or even make a partial payment on it.

The bottom line

Don’t be discouraged by the label of debtor. While debt tends to get a bad reputation, it simply means that a person or company owes money to another person or company. This is standard when talking about money in an official capacity. However, before you authorize an application or sign a contract, read the fine print to know what you’re on the hook for in case you can’t pay your debt.