A debtor is an individual, company, or any other entity that owes money to another individual, company, or entity. The debt is often the result of a loan or credit agreement, where the debtor has borrowed money and promised to pay it back over a certain period of time, often with interest.
For example, if you take out a mortgage to buy a house, you become a debtor to the bank. The bank, in this situation, is the creditor, because it has a claim on the money you borrowed.
In a business context, a company that borrows money from a bank or issues bonds to finance its operations is a debtor. The lenders or bondholders are the creditors. Also, when a company sells goods or services to a customer and allows the customer to pay later, the company becomes the creditor and the customer becomes the debtor.
The terms “debtor” and “creditor” are commonly used in accounting and finance, and understanding these roles is crucial for both financial management and legal reasons.
Example of a Debtor
Let’s say John wants to buy a car that costs $20,000, but he only has $5,000 saved. So, he goes to his local bank and applies for a car loan. The bank agrees to lend him the remaining $15,000 that he needs to buy the car.
In this case, John becomes the debtor because he owes $15,000 to the bank. The bank is the creditor because it has a claim on the $15,000 it loaned to John.
John will need to repay the loan over time, typically through monthly payments that include both a portion of the principal amount that he borrowed (the $15,000) and the interest that the bank charges for the loan.
Until John repays the loan in full, he remains a debtor to the bank. If he fails to make his loan payments, the bank, as the creditor, may take legal action to recover the money it is owed. This could include repossessing the car, which was likely used as collateral for the loan.