A debtor is an entity that owes money. In most cases, a debtor will be an individual, a business, or an organization. The title of “debtor” can be interchangeable with “borrower” or “issuer,” depending on the type of transaction that occurs. With loans, the debtor is referred to as a borrower, while with securities, the debtor is called the issuer. Lastly, you can become a debtor if you file for bankruptcy (other than Chapter 7).
Three scenarios are listed below to clarify what the role of a debtor entails. One follows a cash advance loan, the other with a bond, and the last one with voluntary bankruptcy:
Once a debtor enters an agreement, they will be legally obligated to repay the principal and any other incurred costs through the repayment period. If a debtor does not repay the entirety or portion of the debt, financial institutions have the right to take steps to collect any outstanding balance. Most lenders will use resources such as debt collection agencies, pursue claiming your collateral, and even take the debtor to court to pursue a repayment plan.
There are important differences when comparing a co-signer with a co-borrower, these differences also determine the assigned role of debtor:
The Federal Government has established the CFPB (Consumer Financial Protection Bureau). This agency creates laws and regulations to protect debtors from unfair, deceptive, and abusive tactic—regardless of a debtor’s standing with repayment.
Additionally, although debtors can be summoned to court, they cannot be jailed for unpaid loans, bonds, credit cards, medical debt, etc. The only debt that can mean imprisonment is outstanding child support, tax evasion, and tax fraud.
Anytime you pay for a product or service upfront, whether through electronic funds or cash, you will not be in debt. Paying upfront for purchases that are considered non-essential while using credit for necessities is one way to keep yourself out of unnecessary debt.
Let’s say that you are waiting to get a debt repaid and are asked about your income. In that case, you may be wondering whether you can add that outstanding debt as a valid income source, as you expect it to be paid back to you. Unfortunately, owed debt cannot be used as a source of income, regardless of the amount of debt or the number of borrowers. However, any interest payments or fees paid to you can be shown as an income source.
Although debtors cannot be used as a source of income outright, creditors can use them when showing assets as an individual or company.
A debtor can be an individual or business that owes money to a creditor. Once that money and other agreed-upon payments are made in full, the debtor is discharged from their role. There are practices and regulations in place to protect both creditors and debtors, regardless of how large or small a debt is.
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