What Is Debtor?

A debtor is someone who owes money, either as a company or an individual. If the debt is in the form of a loan from a financial institution, the debtor is called a borrower. However, if the debt is in the form of securities like bonds, the debtor is referred to as an issuer. A person who submits a voluntary request to declare bankruptcy is also recognized as a debtor.

Debtors’ Consequences

Failing to pay a debt is not illegal. Debtors have the freedom to choose which debts to prioritize, except in specific bankruptcy cases. If they don’t fulfill the terms of their debt, they might incur fees, penalties, and a decrease in their credit scores. A lender can also sue a borrower for not paying, which can result in liens or burdens.

Which Laws Provide Protection for Debtors?

The FDCPA is a law that safeguards debtors. It specifies the rules for bill collectors regarding when, where, and how often they can contact debtors. It also highlights the importance of protecting the debtor’s privacy and other rights. However, it only applies to third-party debt collection agencies, which are responsible for collecting debts on behalf of other companies or individuals.

Example

Meet Sal, who wants to purchase a house and is exploring the option of getting a mortgage. Sal collaborates with a bank to secure the necessary funds. The bank provides a loan of $250,000 to Sal, making him indebted to them. In this scenario, Sal becomes the debtor, while the bank becomes the creditor. To secure the mortgage loan, Sal’s home is utilized as collateral. If Sal fails to pay the mortgage, the bank can take the property and sell it to recover the owed money through foreclosure.

Conclusion

Debtors are individuals or companies who owe money to banks or other entities. If the debt is from a bank or financial institution, they are called borrowers. Debtors can also include those who file for bankruptcy voluntarily. It’s important to note that debtors cannot be imprisoned for unpaid consumer debts. While debt collectors cannot threaten debtors with jail time, courts may incarcerate debtors for unpaid child support in certain situations.