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. If you’re a debtor, you are indebted to someone else. 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 is someone who 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; people and companies borrow money from other companies all the time. 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, the debt will eventually be deemed delinquent, and if you don’t pay long enough, it can go into default. Your debt can go into collections somewhere around 180 days of nonpayment. This 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 you may have already been contacted by debt collection agencies, you have protection against unlawful companies who try to get you to pay.

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 making attempts 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.

Final takeaways

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 so you know what you’re on the hook for in case you can’t make payments on your debt.

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