What is a debtor?

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

According to the Federal Reserve, about 77% of Americans had some sort of debt as of 2019. That’s why it’s important for most people to understand how to borrow money 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 may be 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).

Debtor vs. creditor

When a debtor borrows money, they owe a debt to their creditor. For example, if you finance the purchase of a car, you’re a debtor, and the entity giving you the loan is your creditor. You pay back your lender according to a set schedule, usually based on monthly payments.

To evaluate the likelihood of a debtor paying back a debt, creditors usually do a thorough review of a potential borrower’s finances before lending money. 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.

Debt examples

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

Personal loans are typically unsecured debts, meaning you don’t have to offer any collateral the creditor can claim in the event you don’t pay back the loan.

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 an unsecured loan, however, you can expect your credit score to plummet.

Credit cards 

Credit cards allow you to access 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 the debt is backed by collateral (which is usually the car you’re buying). 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 make up the largest amount of household debt in the U.S. and account for 71% of the nation’s total household debt balance, according to the Federal Reserve Bank of New York.

Debtor protection laws

There are many state and federal laws and regulations that protect debtors.

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

The Truth in Lending Act (TILA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act are two important federal laws that protect borrowers nationwide, but there are also a number of other protections in place for debtors.

Truth in Lending Act

The Truth in Lending Act (TILA) requires lenders to disclose specific loan cost information to you before you borrow, such as the loan’s:

• Annual percentage rate
• Monthly payment amount
• Number of scheduled payments
• Late fees
• Total cost
• Total finance charge

The Dodd-Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank act sought to rein in the financial industry in the wake of the Great Recession. This act protects borrowers from numerous unfair or deceptive lending practices that put them at risk. It also led to the creation of the Consumer Financial Protection Bureau, which enforces fair financial practices and helps educate consumers on financial matters.

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

Other regulations

The Equal Credit Opportunity Act prohibits various forms of discrimination against debtors, and the Fair Credit Reporting Act protects information about debtors collected by credit bureaus and similar organizations. The Fair Debt Collections Practices Act governs how creditors can collect debts.

Bear in mind that most of these laws are complicated pieces of legislation covering a wide range of topics, so what we’ve mentioned here is just the tip of the iceberg. To help protect yourself from predatory lenders, try to familiarize yourself with your rights as a borrower and contact the appropriate government agency if you feel you’ve been treated unfairly.

Can you go to jail for not paying a debt?

When a debtor takes out a loan or line of credit, the creditor’s expectation is that they’ll pay the loan back in full, plus any fees and interest.

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

It’s also worth pointing out that this only applies to consumer debts, like credit card debt, auto loans and mortgages. Other types of debt, like child support and tax debt, can result in you going to jail if you refuse a court order to pay or commit a crime to avoid them, like tax evasion.

Common reasons debtors default on loans

Even if you have good intentions to pay back a loan when you sign a contract, sometimes circumstances make it impossible to keep up with the payments. You might find yourself unable to make loan payments if any of the following occur, for instance:

• Job loss
• Illness or injury
• Interest rate hikes
• Natural disasters or pandemics

When you’ve missed payments and know you're at risk of defaulting on a debt, it’s important to take action quickly to limit the severity of the consequences. You might choose to refinance high-interest debt, for example. It can also be helpful to set a realistic budget to pay off high-interest loans first if this is still within your means.

If your debt has become unmanageable and you see no end in sight, try talking with a debt settlement or consolidation firm. A bankruptcy attorney can also help, but bankruptcy is often used as a last resort given the impact it has on the debtor’s credit.

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 taking on a lower-interest personal loan to pay off a debt, negotiating with the creditors for different loan terms or working with a debt consolidation company.