TheTaxHeaven Dictionary - Know the meaning of tax


The term 'debtor' refers to an individual or entity that owes money to another party, often referred to as a creditor. This term is not limited to individuals but extends to organizations such as businesses and banks. Additionally, the debtor label is applicable to entities that have taken loans or issued securities such as bonds. 

When an individual files for bankruptcy, they are designated as a debtor. This debtor status is lifted once all their debts have been cleared. For instance, an individual who secures a loan from a bank is considered a debtor. However, when they deposit money into a bank, they assume the role of a creditor and the bank becomes the debtor. 

Debtor Protection Laws 

Several laws, including the Fair Debt Collection Practices Act (FDCPA), have been enacted to shield debtors from unjust debt collection strategies. Depending on their debt repayment period, debtors can be categorized as either short-term or long-term. 

  • Types of Debtors

  • Short-Term Debtor: This refers to a debtor who owes money for less than a year. Such debt is classified as short-term receivables under current assets on the balance sheet.

  • Long-Term Debtor: This refers to a debtor who owes money for more than a year. This kind of debt is categorized as long-term receivables under long-term assets on the balance sheet.

Debt Recording Timing 

It is not mandatory to record a debt until there is a significant likelihood of liability. Therefore, an individual or entity is recognized as a debtor only when the liability is probable and the potential loss can be quantified. 

Liability Discharge 

A debtor's liability can be absolved either through bankruptcy proceedings or by obtaining consent from the creditor. Once the liability becomes invalid, the entity is no longer considered a debtor for that particular liability. 

It is generally understood that a loan must be repaid to the lender. Debtors and creditors typically enter into an agreement that details the payment terms and any associated discounts. 

While failing to pay a debt is not considered a criminal act, non-compliance with the conditions of the debt can result in fines, penalties, and a decrease in credit score. In such instances, the creditor may resort to legal action against the debtor.