Learn more about the two counterparties in a lending agreement
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
The key difference between a debtor vs. creditor is that both concepts denote two counterparties in a lending arrangement. The distinction also results in a difference in financial reporting. On the company’s balance sheet, the company’s debtors are recorded as assets while the company’s creditors are recorded as liabilities.
Note that every business entity can be both debtor and creditor at the same time. For example, a company may borrow funds to expand its operations (i.e., be a debtor) while it may also sell its goods to the customers on credit (i.e., be a creditor).
A company must carefully manage its debtors and creditors to monitor the lag between incoming and outgoing payments. The practice ensures that a company receives payments from its debtors and sends payments to its creditors on time. Thus, the company’s liquidity does not deteriorate while the default probability does not increase.
What is a Debtor?
A debtor is a person or an organization that agrees to receive money immediately from another party in exchange for a liability to pay back the obtained money in due course of time. In other words, a debtor owes money to another person or organization. The amount owed a debtor repays periodically with or without interest incurred (debt almost always includes interest payments).
Depending on the type of undertaking, debt can be referred to in different terms. For example, if a debt is obtained from a financial institution (e.g., bank), the debtor is usually referred to as a borrower. If the debt is issued in the form of financial securities (e.g., bonds), the debtor is referred to as an issuer.
If there is no possibility to meet the financial obligations, a debtor may file for bankruptcy to seek protection from the creditors and relief of some or all debts. Both individuals and companies can file for bankruptcy. Generally, a debtor can initiate the bankruptcy process through a court. Note that only the court can impose the bankruptcy upon a debtor. However, bankruptcy laws and rules can widely vary among different jurisdictions.
In financial reporting, debtors are generally classified according to the length of debt repayments. For example, short-term debtors are debtors whose outstanding debt is due within one year. The amounts from short-term debtors are recorded as short-term receivables under the company’s current assets. Conversely, long-term debtors owe amounts that are due longer than one year. The amounts are recorded as long-term receivables under the company’s long-term assets.
What is a Creditor?
A creditor is a person or an organization that provides money to another party immediately in exchange for receiving money at some point in the future with or without additional interest. In other words, a creditor provides a loan to another person or entity.
Creditors are generally classified as secured or unsecured. Secured creditors provide loans only if the debtors are able to pledge a specific asset as collateral. In case of a debtor’s bankruptcy, a secured creditor can seize the collateral from the debtor to cover the losses from the unpaid debt. The most notable example of a secured loan is a mortgage in which a piece of property is used as collateral.
On the other hand, unsecured creditors do not require any collateral from their debtors. In case of a debtor’s bankruptcy, the unsecured creditors can make a general claim on the debtor’s assets, but commonly, they are only able to seize a small portion of the assets. Due to this reason, unsecured loans are considered to be riskier than secured loans.
In accounting reporting, creditors can be categorized as current and long-term creditors. Debts of current creditors are payable within one year. The debts are reported under current liabilities of the balance sheet. Debts of long-term creditors are due more than one year after and are reported under long-term liabilities.
Additional Resources
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:
FAQs
Explain your current situation. Tell them your family income is reduced and you are not able to keep up with your payments. Frankly discuss your future income prospects so you and your creditors can figure out solutions to the problem.
What is the difference between debtors and creditors in simple words? ›
Creditors are individuals/businesses that have lent funds to another company and are therefore owed money. By contrast, debtors are individuals/companies that have borrowed funds from a business and therefore owe money.
Do you owe money to debtors or creditors? ›
If you owe money to someone you are their debtor. They are your creditor. There are rules about how creditors can collect debts.
Am I the debtor or creditor? ›
They describe a relationship where one party owes money to another party. The debtor is the party that owes the money (debt), while the creditor is the party that loaned the money. For example, if Jay loans Reva $100, Reva is the debtor and Jay is the creditor.
What should you not say to a creditor? ›
Don't give a collector any personal financial information. Don't make a "good faith" payment, promise to pay, or admit the debt is valid. You don't want to make it easier for the collector to get access to your money, or do anything that might revive the statute of limitations.
How do I convince my debtor to pay? ›
Make Polite Contact
In this instance, a polite reminder can do wonders. But no matter what, debtors are much more likely to pay if you're positive and polite. A phone call, email, or letter that simply asks them if they realize they're behind on their payments is the best way to begin.
Is a customer a debtor or creditor? ›
Bank customers are debtors if they have a loan or owe the bank. Customers who buy goods or services and pay on the spot aren't debtors. Customers of companies that provide goods or services can be debtors if they're permitted to make payment at a later date after accepting the goods.
What is the role of a debtor and a creditor? ›
A creditor is a person or entity that lends money to another party. The debtor is the person who owes money to another person or entity.
Is a vendor a creditor or debtor? ›
Any vendor with an outstanding account balance is considered a creditor. These are vendors whom you expect to pay money to, and are treated as a current liability. It is important to know who you owe money to and when it's due, so the management of accounts payable is crucial to running a business.
How many times can a creditor call you? ›
As of late 2021, the federal Fair Debt Collection Practices Act (FDCPA) limits the number of times a debt collector can call you. In a nutshell, the collector can't call you more than seven times in seven days or within seven days after talking to you about the debt.
A term used in accounting, 'creditor' refers to the party that has delivered a product, service or loan, and is owed money by one or more debtors. A debtor is the opposite of a creditor – it refers to the person or entity who owes money.
How to remember debtors and creditors? ›
Remember that debtors are our customers that owe us money, so we are talking about sales on credit here. And creditors are our suppliers that we owe money to, so we are talking about purchases on credit in that case.
What is the law of debtors? ›
Debtor-creditor law governs situations where one party, known as the debtor, is unable to pay a monetary debt to another, known as the creditor. Debtor-creditor law typically plays out through bankruptcy proceedings.
What happens if a debtor does not pay in time? ›
Lien on Property
If the debt isn't paid, the creditor may be able to seize the property. The creditor may also be able to sell the property to satisfy all or part of the debt. A judgment for money is a lien for the amount of the judgment and post-judgment interest.
What do you call a person who owes money? ›
A debtor is a person or organisation that owes money. This will often be owed for services or goods, or because they have borrowed money. In most instances, the debtor will have a legal obligation to pay the debt. The person they owe the money to is known as a creditor.
How to deal with debt collectors when you can't pay? ›
You might be able to set up a payment plan or negotiate with them to resolve the debt. Warning: You can ask a debt collector to stop contacting you. You should do so in writing. Asking them to stop contacting you will not prevent them from suing you or reporting the debt to a credit reporting company.
What happens if I can't pay my creditors? ›
Eventually, unpaid debts are charged off – meaning the creditor writes them off as a loss. That doesn't mean the debt disappears, however, or that you no longer owe the money. The creditor may transfer the debt to an in-house collection department or they may sell the debt to a third party debt collection agency.
How to get out of debt when you can't pay your bills? ›
Get professional help: Reach out to a nonprofit credit counseling agency that can set up a debt management plan. You'll pay the agency a set amount every month toward each of your debts. The agency works to negotiate a lower bill or interest rate on your behalf and, in some cases, can get your debt canceled.
What should I do if I Cannot pay my debt? ›
It is important to talk about your financial difficulties - the earlier, the better - or you may find yourself in a spiral of debt. If you think you cannot pay your debts or are feeling overwhelmed, seek support. Help is available. A trained debt adviser can talk you through the options available.
