What is a Debtor: A Comprehensive Guide

Whether you’re dealing with loans, credit cards, or financing agreements, knowing the role of a debtor can help you navigate financial transactions with clarity and confidence.

In this article, we’ll delve into the definition of a debtor, their rights and responsibilities, types of debtors, and debt relief options.

What is a Debtor?

The term debtor refers to an individual, a company, or any entity that owes money to another party. The counterpart to a debtor is a creditor – the party to which the money is owed.

There are typically two types of creditors: loan creditors and trade creditors. Loan creditors include banks, building societies, and other financial institutions, while trade creditors refer to suppliers awaiting payment for provided goods or services.

Debtors can incur debt through various means such as loans, credit purchases, mortgages, or other financial obligations.

Types of Debtors

Debtors can be broadly classified into several types based on the nature of the debt, the relationship with the creditor, or the terms of repayment:

• Personal Debtor: This is an individual who owes money due to personal loans, credit card debt, or mortgages.
• Corporate Debtor: A business entity that owes money, typically due to business loans, credit from suppliers, or bonds issued to investors.
• Sovereign Debtor: This refers to a government that owes money, often as a result of bonds or loans taken to fund public spending and projects.
• Secured Debtor: A debtor who has provided collateral (such as personal assets) against the loan. The creditor has a lien on the collateral which can be claimed if the debtor defaults.
• Unsecured Debtor: Unlike secured debtors, these individuals or entities have not provided any collateral against the loan.

Reasons Individuals and Businesses Borrow Money

People borrow money to meet immediate financial needs or to invest in opportunities that they expect will yield returns in the future. For individuals, borrowing can help cover expenses such as education, home purchases, or emergency costs. For businesses, loans are often crucial for funding expansion, covering operational costs, mitigating cash flow issues, or investing in new technology and resources.

Borrowing enables both individuals and businesses to leverage future earnings to meet current objectives or seize growth opportunities.

Responsibilities of a Debtor

The primary responsibility of a debtor is to repay the borrowed money according to the agreed-upon terms with the creditor. This includes making timely payments of both the principal and the interest, if applicable.

Additional responsibilities may include:

• Maintaining communication with the creditor, especially if there are difficulties in meeting the repayment terms.
• Ensuring that all information provided to the creditor is accurate and truthful.
• Adhering to all terms and conditions specified in the lending agreement.

Failure to meet these responsibilities can lead to legal consequences, damage to credit ratings, or seizure of assets if the debt is secured.

Legal Rights and Protections for Debtors

Debtors are afforded a range of legal rights and protections designed to prevent unfair treatment and to ensure that debt collection practices are conducted reasonably and respectfully.

Here are some of the key legal rights and protections for debtors:

• Consumer Credit Act 1974: This act requires lenders to provide clear, transparent information about the terms of credit before an agreement is signed, including the Annual Percentage Rate (APR), terms of repayment, and any charges for late payment.

• Financial Conduct Authority (FCA) Regulations: The FCA sets standards on how debts should be collected. Creditors and debt collectors must treat debtors fairly, without using aggressive practices, and must consider circumstances where the debtor is experiencing financial hardship.

• Data Protection Act 2018 (incorporating GDPR): This act ensures the protection of personal data. Debt collection agencies and creditors must handle debtor information lawfully and are prohibited from disclosing debt information to unauthorised parties.
• Credit Services Association (CSA) Code of Practice: Members of the CSA must adhere to ethical guidelines that include treating customers with consideration and managing debts sympathetically and positively.
• Financial Ombudsman Service (FOS): Debtors who feel mistreated by creditors or debt collectors can file a complaint with the FOS, which is an independent body that resolves disputes between consumers and businesses providing financial services.

Debt Relief Options

Individuals struggling with debt have several relief options available to them. These options are designed to help reduce, restructure, or write off debts depending on the individual’s financial circumstances.

Individual Voluntary Arrangement (IVA)

An IVA is a formal and legally binding agreement between the debtor and creditors to pay back debts over a period of time, typically five years. Creditors who agree to the IVA cannot take further legal action against the debtor and any debt interest or charges are usually frozen.

However, it’s important to note that IVAs affect the debtor’s credit rating for at least six years, and failure to comply with the terms can lead to bankruptcy.

Debt Relief Order (DRO)

A DRO is aimed at individuals with lower levels of debt who do not own significant assets and have little disposable income. It’s a way to have debts frozen for 12 months, and if the debtor’s financial situation hasn’t improved by then, the debts are written off.

This option is cheaper than bankruptcy (£90 fee), but eligibility requirements are strict, including not owning your home and having assets of less than £2,000, the debt must also not exceed £30,000, and not all debts (e.g., student loans and court fines) are included.

Bankruptcy

Bankruptcy is a legal status for people who cannot repay their debts. Once bankruptcy is filed (a cost of £680 in England and Wales), most debts are written off and creditors once the bankruptcy is declared.

Bankruptcy is often seen as a last resort as it has severe consequences. For example, it can affect your ability to obtain credit for many years and may impact your employment in certain sectors, your assets, including your home and certain possessions, can be sold, and your bankruptcy is publicised, potentially affecting your reputation.

Navigating the Complex World of Debt

Understanding the role of a debtor is essential for navigating the complexities of financial transactions. Whether you’re an individual or a business, being aware of your rights, responsibilities, and available debt relief options empowers you to make informed decisions.

In navigating your financial journey, consider partnering with Mazuma’s accounting services to ensure expert guidance and support every step of the way.