What Is a Debtor?

Being a debtor simply means you borrowed money and are still in repayment. The MarketWatch Guides team is here to help you understand your role and rights as a borrower to help you navigate debt repayment

If you have a car loan, own a credit card or borrowed money to pay for education and still have a balance, you are considered a debtor. The person or financial institution you borrowed money from is known as a creditor. When you borrow money from a creditor, you agree to the repayment terms set by the creditor.

What Is a Debtor?

When you borrow money from an individual, bank, credit union or lending institution, you become a debtor. A debtor refers to someone with debt to repay. The individual, bank or company that lends you the money is known as the creditor. A debtor is sometimes referred to as a borrower, customer, lessee, mortgagor or payer.

When you apply for a loan or credit, creditors rely on their underwriting process to determine eligibility for lending. During this time, creditors set the terms of the financial agreement including the loan term, interest rate, fee schedule and other details. 

If you are approved for a loan or credit line, you must agree to the terms and conditions of the lending product in order to move forward. Once you’ve repaid the debt in full, you are no longer considered a debtor.

Common Types of Debt

Typically, consumer debt occurs in the form of a loan or a type of credit, such as a credit card or line of credit. Common types of debt include: 

• Personal loans
• Credit card debt
• Mortgages 
• Car loans
• Student loans
• Medical debt
• Small business loan

Payout and repayment vary depending on the type of debt. If you’re approved for a personal loan, the bank or creditor typically sends you a lump sum payment and you repay it in monthly installments. Student loan funds are typically sent directly to the school. Secured loans, like mortgages, home equity loans and auto loans, require collateral. When you take out a mortgage, the property becomes the collateral. With a car loan, the vehicle is the collateral. If payments are missed with a secured loan like a mortgage, your house is at risk for foreclosure. 

With credit cards and lines of credit, you receive a revolving credit line that you can use up to your credit limit and pay off repeatedly.

What is a Creditor?

A creditor is an individual or lending institution that lends money to individuals or businesses. Creditors can also be family or friends who have lent money to someone. Often, there is no written agreement or contract when borrowing money from family or another individual.

Creditors, also known as lenders, lessors or mortgagees, earn money by charging interest and fees on lending products. They determine which applicants borrow money or receive credit based on underwriting standards. To mitigate lending risks, creditors assess an applicant’s creditworthiness by examining their credit score, financial history, income, collateral and other criteria. Debtors must agree to the terms and conditions of the lending agreement to receive a loan or credit card. 

Creditors play a significant role in economic growth. They provide individuals and businesses with capital to invest, pursue goals, fund projects, make significant purchases, pay for school, and launch or expand a business. Without borrowing, these funds may otherwise be unavailable to debtors. Loan funds can also provide additional cash flow.

Below are examples of common debtor-creditor relationships.

Rights and Responsibilities of a Debtor

When you borrow money, you are responsible for repaying the principal amount and any additional fees or interest charges incurred according to the agreed-upon terms. If you fail to meet your obligation, you could face penalties or increased interest rates.

Late or missing payments can also affect your credit score if the debt is reported to credit reporting bureaus. Negative marks can stay on your credit report for up to seven years. This could potentially affect your ability in the future to obtain credit, rent an apartment or, in rare cases, secure employment. You can file a dispute with the debt collector and credit reporting bureau if you feel they made an error. 

Debt collectors can file a lawsuit against you if you refuse to pay your debt. You won’t receive jail time, but you could face wage garnishments or have money taken directly from your bank account. Social Security and other federal benefits are generally exempt from garnishment, except in certain cases that involve child or spousal support, student loans or delinquent taxes.

Legal Protections for Debtors

Debtors have some legal rights regarding consumer debt. The Fair Debt Collection Practices Act (FDCPA) is a federal law that limits the actions debt collectors can take when attempting to collect certain types of debt. 

FDCPA

The FDCPA applies to debt collectors, not the original creditor, and doesn’t apply to business debts. It limits how and when debt collectors can communicate with debtors. The law was enacted to protect consumers against deceptive debt collection practices. Many states have similar laws in place that limit debt collection practices, including some that apply to the original creditor. 

Bankruptcy limits what debt collectors can do legally. If you file for bankruptcy, debt collectors are prohibited from continuing to pursue collection while the court case is pending. If your debt is discharged in bankruptcy, debt collectors cannot try to collect those debts. If there is collateral related to the debt, such as a vehicle, they may be able to repossess it after bankruptcy discharge. Keep in mind your bankruptcy remains on your credit report for up to 10 years or longer. 

Consult an attorney if you’re facing legal action from a debt collector. Seek help if the debt collector made an error, is harassing you, or you need legal advice. You can report issues with a debt collector to the Consumer Financial Protection Bureau (CFPB), Federal Trade Commission (FTC) or your state attorney general’s office. Free or reduced-fee legal help is available to qualified individuals. You can search for legal help near you through the Legal Services Corporation or the American Bar Association.

FAQ: What Is a Debtor?

Data accurate at time of publication