Debtors and creditors, what are they? What is the difference between them?

Within the world of finance and trade relations, we can find people or individuals who play a specific role. In this case, the debtor is perhaps one of the most recurring and basic concepts that currently exist in terms of contracts or loans of money from any certified agency.

Next, we will know some more relevant definitions regarding this specific concept, as well as its relationship with the creditor, types of debtors, characteristics… among other aspects that are important to know its impact within any loan or credit.

What is a debtor: definition

What is a debtor: definition

In general, a debtor is a company or individual that owes money. If the debt is in the form of a loan from a financial institution, the debtor is referred to as a borrower, and if the debt is in the form of securities, such as bonds, the debtor is referred to as the issuer. Legally, someone who files a voluntary petition to file bankruptcy is also considered a debtor.

Except in certain bankruptcy situations, debtors can prioritize the payment of their debts as they wish, but if they do not comply with the terms of their debt, they may face charges and penalties, as well as a drop in their credit score. In addition, the creditor may take the debtor to trial for the matter. This can lead to liens.

One of the direct consequences of owing money is that our name is very likely to become part of some delinquent file, such as Asnef (read what Asnef is). If this is your case, in these other articles we explain how to know if I am in Asnef online and how to leave Asnef without paying.

Relationship between debtor and creditor

Relationship between debtor and creditor

Informal creditor-debtor relationships develop between companies, in the same way that they extend between individuals. Companies can and sometimes do, reach out to other companies with courtesies, gratitude, obligations, respect and assistance of many types.

However, the characteristic that defines the formal creditor-debtor relationships discussed in this article is the existence of a legally binding agreement (or contract).

We talk about formal relationships in these cases:

  • Banks that grant loans to individuals or companies become their creditors in a legally binding formal relationship.
  • Merchants who sell goods and services on credit, or with an invoice payable at a future date, become legal creditors of their customers.
  • Companies can lend funds to customers or other companies in the form of documents payable. A document payable represents a legally binding creditor-debtor relationship.
  • Any purchase from one party to another represents a legally binding creditor-debtor relationship when both parties sign a legal contract for sale.

Debtor Examples

The companies that issue bonds are perhaps the best known debtors. They must provide their bondholders with fixed payments of interest and capital on specific dates and, in some cases, they must be willing to convert that debt into capital in specific proportions or pay the debt before certain events occur.

However, a debtor may also be required to perform certain tasks or even refrain from performing certain actions. When a debtor breaches his obligations, he is sometimes considered delinquent.

Obligations of the debtor

Obligations of the debtor

Debtors are subject to contractual obligations. As such, if they fail to meet their obligations, creditors tend to have the right to go to court.

A significant amount of reputational damage can also occur when an entity, especially a public company, fails to meet its obligations. In some cases, even the speculation that a debtor might not fulfill his obligations may cause the price of his shares to fall and make it very difficult to obtain financing or other assistance later.

Types of debtors according to risk

Types of debtors according to risk

Usually a debtor is classified by the risk that the same entails for the creditor, that is, the estimated time in which he can pay the debt is measured, or if he can do so ultimately. Banks and insurance agencies (or any lending entity in general) use this methodology to avoid losses and enter into legal matters beyond their needs.

In most countries, classifications are measured as follows:

  1. Risk Level 0: This level of risk is the lowest, it indicates that there is no visible risk where the debtor cannot pay the borrowed money. Previous studies are done to analyze the amount of income in a given time, also if it has a fixed job, as well as a positive credit quality.
  2. Risk Level 1: In this level you can see some variations, where we can see that the debtor has some small difficulties regarding his net income of money and economic stability in general, however, he is still able to opt for a loan with certain restrictions
  3. Risk Level 2: This level of risk is quite delicate, since the studies in this case indicate an economic stability on the part of the debtor that is not within the work levels of the lender, that is, does not meet the minimum requirements For a loan. You can still ask for a loan, but it causes a very high risk of losing money.