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What Is a Debtor? Definition, Uses and Importance.

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A debtor is a company or an individual who owes money to the creditor or lender. Whenever a debtor obtains funds from a financial institution, the debtor is referred to as a borrower. Whenever the debtor gets funds from a financial institution in securities (such as bonds), the debtor is referred to as an issuer. The person who submits a voluntary petition to declare bankruptcy is also legally referred to as a debtor in legal terms.

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Importance of debt management

As a strategy, debtor management entails creating and monitoring regulations that regulate how an organization extends credit to its clientele. Customers who fail to pay back the full amount owed on their credit purchases will result in less bad debt for the company if this procedure is followed.

Once a potential customer’s creditworthiness is determined, a credit limit is established. The company monitors the customer’s usage of that credit and their compliance with the terms and conditions of the credit agreement as part of the debtor management process.

Debtor vs. Creditor

Debtors are the polar opposite of creditors. In the financial world, creditors are the ones who lend money to debtors. Creditors, like debtors, can be either individuals or legal entities. Creditors can also be businesses that provide goods and services. An organization that provides supplies or services with the expectation of receiving payment later is referred to as a creditor in this context.

In addition, if they have loaned money to you, your family or friends can be deemed creditors, sometimes known as personal creditors. Actual creditors are banks or finance corporations that have entered into a legally binding agreement. By charging debtors fees or interest, creditors can make a profit.

How debt is structured

Most people will not have to worry about creditors lining up to collect significant debts from their estates if their property is not subjected to probate. In most cases, the surviving relatives merely pay the legitimate debts, such as monthly payments, taxes, and medical and burial expenditures, rather than collecting more money.

You will still have legal duties to your creditors — such as a credit card company — even though you avoid going through the probate process. Any assets that passed outside of probate may be subject to the claims of creditors after your death if you do not leave enough money to pay your bills and taxes, and if you do not leave enough to pay your debts and taxes, you may be exposed to the claims of creditors after your death.

Your executor (the person chosen in your will to handle your affairs after you die) may demand that whoever inherited the property turn over some or all of it for creditors to be paid if there is a probate proceeding. Creditors, on the other hand, have a limited amount of time — typically three to six months in most states — to submit official claims to your executor before your estate is closed. After the deadline has passed, a creditor who has been duly advised of the probate court action will be unable to bring a claim.

When a property is not probated, creditors’ claims are not snuffed out as soon as they would be if the property were probated. If a creditor can locate the property, they might sue the new owner to collect the debt, which could happen a year or two later.

Avoiding probate may potentially provide more protection from creditors in the long run if done correctly. When a property is distributed without the use of probate, there is no legal necessity that creditors be notified in writing as it is in the probate process. It’s possible that they won’t find out about the death for years. They may not be aware of the whereabouts of the property, and, mainly if the amount is modest, it may not be worth their time to seek down the new owners and attempt to collect the debt.

How debts can be used

Debtors are individuals or businesses who owe money to others (such as banks). Individuals or businesses who owe money are referred to as debtors, and banks and financial institutions are referred to as borrowers if the debt is owed to them. Debtors might also include anyone who voluntarily submits a petition to declare bankruptcy on their behalf.

Debtors who fail to pay their consumer debts will not be prosecuted in court. Debt collectors cannot threaten debtors with jail time, but courts have the authority to place debtors in jail for nonpayment of child support or taxes, among other things.

Synonyms of Debtors

  • Borrower
  • Bankrupt
  • Mortgagor
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