Debtor

A debtor is someone who owes money. Debt can be a loan from a bank or a credit union, then the debtor is the borrower. Securities (bonds) can be a debt, then the debtor is the issuer. By law, a debtor is also a person who applies for bankruptcy willingly.

Understanding Debtors

Debtors can determine the payment order themselves, but if they do not meet the repayment conditions, they are subject to fines, fees and a credit score decrease, and the creditor can go to court, except in certain cases of bankruptcy. A person who fails to pay a debt is not a criminal, but he or she may be charged with a lien or encumbrance.

Debtor vs. Creditor

A creditor is someone who lends money, the opposite of a debtor. Creditors and debtors can be companies as well as individuals. If a company provides delivery services and accepts payment later, it is also considered as a creditor.

Friends or relatives can also be creditors in the case of a personal loan. But the real creditors are financial institutions (banks, credit unions), with which a legal contract is signed. Such lenders charge a fee or interest. This allows them to make money from debtors.

Can Debtors go to jail for unpaid debts

Before the Civil War, there were prisons for debtors in the United States. Nowadays, debtors are not imprisoned for unpaid consumer debts (credit cards or medical bills). There is the Fair Debt Collection Practices Act (FDCPA) which prohibits endangering debtors with jail or prison. However, tax or child support avoidance is considered a crime by the courts. Debtors can go to jail for that.

In some cases, if a court order obligates the debtor for making a payment on the debt, and the debtor skips the payment, it is considered as contempt of court. In this case, it may be a reason for imprisonment.

What laws protect Debtors

The FDCPA is a consumer protection law that defines when, where and how often creditors can contact debtors. This law helps to protect debtors, their rights and their privacy. Unfortunately, this law can be applied only to third-party debt collection agencies. They provide debt collection services on behalf of creditor companies or individuals.

What can a creditor do if a Debtor doesn't pay

The creditor has several ways to repay the debt. The creditor can demand collateral from the debtor (a house, a car) if the loan is secured (mortgage, car loan). Otherwise, the creditor can initiate a lawsuit against the debtor in court. In this lawsuit, it is possible to confiscate the debtor's salary or get back the debt in other ways.

Example of a Debtor

Let’s consider the purchase of a house with a mortgage. For example, Sam is a bank customer and wants to apply for real estate financing. Let's say his mortgage with the bank is $300,000.

Sam is a debtor to his bank now. In this case, the bank is the lender and the real estate (house) is the collateral. Thus, this loan has collateral.

If Sam fails to pay the mortgage to the bank, the bank can confiscate his real estate (house), sell it, and repay the debt.