What Is a Debtor?
A debtor is a company or individual who owes money. If the debt is in the form of a loan from a financial institution, the debtor is referred to as a borrower, and if the debt is in the form of securities—such as bonds—the debtor is referred to as an issuer. Legally, someone who files a voluntary petition to declare bankruptcy is also considered a debtor.
Key Takeaways
- Debtors are individuals or businesses that owe money, whether to banks or other individuals.
- Debtors are often called borrowers if the money owed is to a bank or financial institution, however, they are called issuers if the debt is in the form of securities.
- Debtors cannot go to jail for not paying consumer debt (e.g. credit cards).
- The Fair Debt Collection Practices Act (FDCPA) prevents bill collectors from threatening debtors with jail time, but courts can send debtors to jail for unpaid taxes or child support.
- Creditors may have other recourse if there’s collateral, such as repossession, or they can take debtors to court for garnishments.
Understanding Debtors
It is not a crime to fail to pay a debt. Except in certain bankruptcy situations, debtors can prioritize their debt repayments as they like, but if they fail to honor the terms of their debt, they may face fees and penalties as well as a drop in their credit scores. Additionally, the creditor may take the debtor to court over the matter. This may lead to liens or encumbrances.
Debtor vs. Creditor
Creditors are the opposite of debtors. Creditors are the ones that extend credit to debtors. Creditors, like debtors, can be a person or entity. Creditors can also be companies that provide supplies. In the case that a company offers supplies or services and will accept payment at a later time, they are acting as a creditor.
As well, family or friends can also be considered creditors if they’ve lent money, considered a personal creditor. Real creditors are banks or finance companies with a legal contract. Creditors make money off debtors by charging fees or interest.
Can Debtors Go to Jail for Unpaid Debts?
In the U.S., debtors' prisons were relatively common until the Civil War era, at which time most states started phasing them out. In contemporary times, debtors do not go to jail for unpaid consumer debt such as credit cards or medical bills. The set of laws governing debt practices activities, known as the Fair Debt Collection Practices Act (FDCPA), forbids bill collectors from threatening debtors with jail time. However, the courts can send debtors to jail for unpaid taxes or child support.
In some cases, there are exceptions to this rule. For example, in some states, if a debtor has been ordered by the court to pay a debt and misses a payment, they are held in contempt of court, and being in contempt of court can result in jail time, thus indirectly sending the person to jail for being a debtor.What Laws Protect Debtors?
The FDCPA is a consumer protection law, designed to protect debtors. This act outlines when bill collectors can call debtors, where they can call them, and how often they can call them. It also emphasizes elements related to the debtor's privacy and other rights. However, this law only pertains to third-party debt collection agencies, such as companies trying to collect debts on behalf of other companies or individuals.