What is a debtor? Definition and examples
If you owe money, you are a debtor. A debtor is a person, company, organization, country, or any entity that owes money. Debtors have a legal obligation to pay back what they owe.
If ACME Inc. borrowed $50,000 from its bank, it is a debtor. We refer to the lender as the creditor.
Wikipedia has the following definition of the term:
“A debtor is an entity that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor.”
“When the counterpart of this debt arrangement is a bank, the debtor is more often referred to as a borrower.”
Etymology of debtor
Etymology is the study of where words come from, i.e., their origins, as well as how their meanings have evolved over time.
In twelfth-century England, the word Dettur and Dettour emerged, with the meaning “one who owes or is indebted to another for money, services, or goods.”
It came from the Anglo-French word Detour and the Old French word Detor, which came directly from Debitor, meaning “debtor.”
Between about 1560 and 1660, the spelling of the word became Debtor.
Borrower and issuer
Both terms, borrower and issuer, can mean an entity that owes money. However, we use them in different situations
If my bank grants me a loan, I am the borrower and the bank is the creditor. Any arrangement where a loan is involved has a borrower and creditor.
When governments or large corporations want to borrow money, they may issue bonds. Investment firms, pension funds, and other investors including individuals buy the bonds. In this case, we call the lenders bondholders and borrowers issuers.
Bonds are super-secure investments which earn interest.
If I supply ACME Furniture Inc. with, for example, wood, I will send them an invoice with the delivery. The invoice may include the following phrase: “Payment Terms: 30 days from date of invoice.”
This means that ACME can pay me after thirty days. During that period, ACME owes me money – it is a trade debtor and I am a creditor.
It is common to drop the word ‘trade’ and simply refer to ACME as a debtor.
Suppliers will first check out the creditworthiness of a buyer before offering credit terms. Creditworthiness refers to an entity’s ability to pay back a debt on time. If you are a good debtor, i.e., you pay what you owe on time and in full, you are creditworthy. If you have defaulted on a debt, i.e., never paid it back, you are not seen as creditworthy.
In some cases, my debtor might also be my creditor. For example, let’s suppose I deliver wood to ACME Furniture Inc. on the same day that it delivers a table to my company. We both offer each other 30-day payment terms.
As far as the wood purchase is concerned, I am the creditor and ACME is the debtor. But ACME is my creditor and I am the debtor regarding the table purchase.