What is a debtor?

When you borrow money, you take on debt and become a debtor

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When you get a loan — whether it’s a car loan, home loan, student loan, personal loan or loan from a family member — you assume a debt and become a debtor.

According to the Federal Reserve Bank of New York, American households in the first quarter of 2023 held over $17 trillion in debt, nearly $3 trillion higher than at the end of 2019. Household debt includes mortgages, auto loans, student loans, credit cards and more.

With so many consumers holding debt, it’s important to understand how to borrow responsibly and what to do if you become overwhelmed by debt.


Key insights

  • Any individual or company that owes money is a debtor.
  • Your creditor can seize collateral assets or sue you to garnish your wages for certain unpaid debts.
  • You can’t go to prison for failing to pay a consumer debt, but you can get charged with a crime if you fail to appear in court for any hearings related to your debt.

Debtor definition

“Debtor” is a broad term that refers to any individual or entity that borrows money (a person who takes on a debt is also called a “borrower”). Once you take out a loan for something such as a car, home, educational expenses or medical bills, you become a debtor.

Debtor vs. creditor

A creditor is a person or entity that lends money or extends credit to another party. Once this happens, the other party becomes the debtor. So, a debtor borrows money or obtains credit from a creditor.

The debtor must repay the borrowed funds or fulfill their credit obligations to the creditor within the agreed-upon terms and conditions.

Debt examples

There are many types of debt, and each has its own average interest rates, repayment schedule and terms. We’ve broken down some of the more common types of debt.

Personal loans
Personal loans are installment loans you can put toward almost any purchase. Common uses include home remodeling, paying off medical debt and wedding expenses. They’re typically unsecured, meaning you don’t need to provide collateral for your creditor to claim if you default. If you do fail to repay, however, you can expect your credit score to plummet.
Credit cards
Credit cards allow you access to a revolving line of credit. They usually have high interest rates and low monthly payment requirements, making them one of the hardest debts to pay back . Like personal loans, credit cards are usually unsecured.
Auto loans
A car loan is almost always a secured loan, meaning collateral (which is usually the car you’re buying) backs the debt. So, if you default on a car loan, your creditor can repossess the vehicle to cover the outstanding debt. Auto loans are typically installment loans, where you pay your creditor over the course of several months or years until you’ve paid in full.
Mortgages
A home loan is another type of secured debt, which means the creditor can foreclose on the home if you can’t make the agreed-upon payments. Mortgages account for the majority of the nation’s household debt, according to the Federal Reserve.

What creditors look for in a debtor

Before lending money, a creditor evaluates the likelihood that a debtor will pay back the debt. To do this, they do a thorough review of the potential borrower’s finances. This often includes getting a copy of the debtor’s credit report and evaluating factors like the debtor’s:

  • Credit score
  • Employment history
  • Income
  • Debt-to-income ratio
  • Payment history on other debts
  • Bankruptcies and defaulted loans

High-risk debtors commonly encounter higher interest rates, lower loan limits and outright loan denial.

» MORE: How to get a personal loan with bad credit

Debtor rights and protections

There are laws in place extending rights for debtors. Many of these laws focus on fair debt collection practices and lender’s responsibilities for fully disclosing important loan information, such as the Truth in Lending Act (TILA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“Every state or jurisdiction will have its own laws regulating lending, especially for consumer loans. For example, such a law may limit the maximum amount a lender can charge a borrower for interest,” explained attorney Nathan J. Brelsford of Azeros Legal, a firm in Phoenix that helps clients facing bankruptcy.

“These acts give the Consumer Financial Protection Bureau (CFPB) the authority to oversee lenders and make sure they're treating borrowers fairly. The CFPB can take action against lenders if they find that they're engaging in unfair, deceptive or abusive practices.”

How to be a responsible debtor

Before taking on debt, evaluate your current financial situation, including income, expenses and existing debts. This can help you ensure you can comfortably manage the new debt payments. Also, fully consider the purpose of the debt and whether it’s necessary and aligns with your long-term financial goals.

Taking on debt is a big decision, but the good news is you can successfully manage your debt with responsible habits.

  • Create a budget: Develop a comprehensive budget so you can track your income and expenses, ensuring you’re allocating enough funds to meet your debt obligations each month.
  • Make payments on time: Paying your debts on time not only helps you avoid late fees but also lessens the chance of a negative impact on your credit score. You can set reminders or automate payments for even easier payment management.
  • Avoid overborrowing: Borrow only what you genuinely need and can comfortably afford to repay. Avoid taking on excessive debt, which only leads to financial stress and difficulty maintaining payments.
  • Communicate with creditors: If you find yourself facing financial difficulties, be proactive and communicate with your creditors. They may offer temporary solutions or alternative payment plans so you can stay on track and avoid default.
  • Monitor your credit score: Regularly check your credit report and credit score. Being aware of your credit standing allows you to address any errors and work towards improving your creditworthiness, which may lead to better borrowing opportunities in the future.

» MORE: Good debt vs. bad debt

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FAQ

Is a debtor the same as a buyer?

No, a debtor is not the same as a buyer. A debtor is someone who owes money to a creditor, usually from borrowing funds or obtaining credit, while a buyer is someone who purchases goods or services from a seller in exchange for payment.

How does debt affect your credit?

Maintaining a history of on-time debt payments can positively influence your credit score, while missed or late payments can lower it, making it harder to qualify for future loans and credit at favorable terms. Another factor is credit utilization, which refers to the percentage of available credit you are using. Lenders prefer a lower usage ratio.

What is debt collection?

Debt collection is the process of pursuing and collecting outstanding debts from individuals or businesses that haven’t paid their loans or credit obligations. Debt collectors are either hired by the original creditor or work for collection agencies. Debt collectors use various methods for contacting debtors and getting repayment within the guidelines of laws and regulations.

Can you go to jail for not paying a debt?

If you don’t repay a consumer debt, you likely won’t face jail time — debtors' prisons are a thing of the past. However, failing to pay a debt means it’s possible a creditor can sue you and you have to go to court. In the event you don’t show up, you could still be arrested for contempt of court.

Bottom line

When you borrow money, you become a debtor — that means you’re indebted to the creditor you borrow from. There are protections in place for debtors, but understanding all the terms of a loan before signing helps you avoid taking on a debt you can’t handle.

If you find yourself defaulting on a debt, there are solutions, like consolidating your debt into a lower-interest personal loan or seeking credit counseling and negotiating with creditors for different loan terms.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Federal Reserve Bank of New York, “ Total Household Debt Reaches $17.05 trillion in Q1 2023; Mortgage Loan Growth Slows .” Accessed Aug. 1, 2023.
  2. Office of Financial Readiness “ Truth in Lending Act .” Accessed Aug. 1, 2023.
  3. Federal Trade Commission, “ Dodd-Frank Wall Street Reform and Consumer Protection Act, Titles X and XIV .” Accessed Aug. 1, 2023.
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