Debtor

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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.

Debt deferred payment, or series of payments, that is owed in the future

Debt is when something, usually money, is owed by one party, the borrower or debtor, to a second party, the lender or creditor. Debt is a deferred payment, or series of payments, that is owed in the future, which is what differentiates it from an immediate purchase. The debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. The term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. For example, in Western cultures, a person who has been helped by a second person is sometimes said to owe a "debt of gratitude" to the second person.

A legal person in legal context typically is a person —whether human or non-human—that is recognized as having certain privileges and obligations such as the legal capacity to enter into contracts, to sue, and to be sued.

A counterparty is a legal entity, unincorporated entity, or collection of entities to which an exposure to financial risk might exist. The word became widely used in the 1980s, particularly at the time of the Basel I in 1988.

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If X borrowed money from his/her bank, X is the debtor and the bank is the creditor. If X puts money in the bank, X is the creditor and the bank is the debtor.

It is not a crime to fail to pay a debt. Except in certain bankruptcy situations, debtors can choose to pay debts in any priority they choose. But if one fails to pay a debt, they have broken a contract or agreement between them and a creditor. Generally, most oral and written agreements for the repayment of consumer debt - debts for personal, family or household purposes secured primarily by a person's residence - are enforceable. [1]

Consumer debt

In economics, consumer debt is the amount owed by consumers. It includes debts incurred on purchase of goods that are consumable and/or do not appreciate. In macroeconomic terms, it is debt which is used to fund consumption rather than investment.

For the most part, debts that are business related must be made in writing to be enforceable by law. If the written agreement requires the debtor to pay a specific amount of money, then the creditor does not have to accept any lesser amount, and should be paid in full.

Also, if there was no actual agreement but the creditor has proven to have loaned an amount of money, undertaken services or given the debtor a product, the debtor must then pay the creditor.

The history of the term “debtor”

Anthropologist David Graeber suggests in Debt: The First 5000 Years that trading began with some form of credit namely the promise to pay later for already handed over goods. Because of this it can be said that debtors and creditors existed even before the implementation of coinage. [2]

<i>Debt: The First 5000 Years</i> book by anthropologist David Graeber published in 2011, about the function of debt in human history

Debt: The First 5,000 Years is a book by anthropologist David Graeber published in 2011. It explores the historical relationship of debt with social institutions such as barter, marriage, friendship, slavery, law, religion, war and government; in short, much of the fabric of human life in society. It draws on the history and anthropology of a number of civilizations, large and small, from the first known records of debt from Sumer in 3500 BC until the present.

The term debtor comes from the word debt, which originated from the French word dette, which came from the Latin word debere, meaning to owe. [3]

Types of debtors

According to numbers released in March 31, 2013 by the U.S. Federal Reserve Board, household debt has passed the $11 trillion mark in the United States. Student loan debt will also soon pass the trillion-dollar mark. [4]

Household debt

Household debt is defined as the combined debt of all people in a household. It includes consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries.

There are many different types of debts, that can cause the debtor and creditor relationship to arise. Some of these areas include:

Credit card debt A form of consumer debt accumulated through the use of credit cards.

Credit card debt is an example of unsecured consumer debt, accessed through credit cards.

[5]

Being a debtor is not restricted to an individual, as in business there is also company debt. Many companies’ heavily invest into accountancy and rely on insolvency solutions to prevent debt from being left aside.

Default

Default occurs when the debtor has not met its legal obligations according to the debt contract, e.g.- it has not made a scheduled payment, or has violated a covenant in the debt contract. Default may occur if the debtor is either unwilling or unable to pay its debt. This can occur with all debt obligations including bonds, mortgages, loans, and promissory notes. [6]

If the debt owed becomes beyond the possibility of repayment, the debtor faces insolvency or bankruptcy; in the United Kingdom and some states of the United States until the mid-19th century, debtors could be imprisoned in debtor's prisons, while in some countries such as Greece debtors are still imprisoned.

Debtor in Bankruptcy and Individual Voluntary Arrangements

An Individual Voluntary Arrangement is a legally binding arrangement supervised by a licensed Insolvency Practitioner, the purpose of which is to enable an individual, sole trader or Partner ("the Debtor") to reach a compromise with his creditors and avoid the consequences of bankruptcy. The compromise should offer a larger repayment towards the creditor's debt than could otherwise be expected were the Debtor to be made bankrupt. This is often facilitated by the Debtor making contributions to the arrangement from his income over a designated period or from a third party contribution or other source that would not ordinarily be available to a Trustee in Bankruptcy. [7]

Other uses

In the Latin version of the Lord's Prayer, the words Et dimitte nobis debita nostra/Sicut et nos dimittimus debitoribus nostris, the words Debtor and Debt are sometimes translated as Sinner and Sin. This particular understanding of sin, as a form of debt that humanity inherits, is related to the soteriological theory of substitutionary atonement, which states that Jesus died on the cross as a propitiation, or substitute, for sinners. [8]

See also

Related Research Articles

Bankruptcy legal status of a person or other entity that cannot repay the debts it owes to creditors

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Default (finance) failure to meet the conditions of a loan

In finance, default is failure to meet the legal obligations of a loan, for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity. A national or sovereign default is the failure or refusal of a government to repay its national debt.

Debenture

In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. The legal term "debenture" originally referred to a document that either creates a debt or acknowledges it, but in some countries the term is now used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company's capital structure, it does not become share capital. Senior debentures get paid before subordinate debentures, and there are varying rates of risk and payoff for these categories.

Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.

Loan transfer of money that must be repaid

In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient incurs a debt, and is usually liable to pay interest on that debt until it is repaid, and also to repay the principal amount borrowed.

Debt consolidation form of debt refinancing that entails taking out one loan to pay off many others

Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others. This commonly refers to a personal finance process of individuals addressing high consumer debt, but occasionally it can also refer to a country's fiscal approach to consolidate corporate debt or Government debt. The process can secure a lower overall interest rate to the entire debt load and provide the convenience of servicing only one loan or debt.

Hypothecation is the practice where a debtor pledges collateral to secure a debt or as a condition precedent to the debt, or a third party pledges collateral for the debtor. A letter of hypothecation is the usual instrument for carrying out the pledge.

Promissory note negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other

A promissory note, sometimes referred to as a note payable, is a legal instrument, in which one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand of the payee, under specific terms.

Insolvency is the state of being unable to pay the money owed, by a person or company, on time; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

Unsecured debt

In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. That differs from secured debt such as a mortgage, which is backed by a piece of real estate.

Bankruptcy in the United Kingdom is divided into separate local regimes for England and Wales, for Northern Ireland, and for Scotland. There is also a UK insolvency law which applies across the United Kingdom, since bankruptcy refers only to insolvency of individuals and partnerships. Other procedures, for example administration and liquidation, apply to insolvent companies. However, the term 'bankruptcy' is often used when referring to insolvent companies in the general media.

In England and Wales, an individual voluntary arrangement (IVA) is a formal alternative for individuals wishing to avoid bankruptcy.

When an individual been made bankrupt in the UK it's legal and advisable to have a make use of an IVA referred to as a "fast-track individual voluntary arrangement" which implies the bankruptcy order can be annulled if all the terms have been fulfilled. It is necessary to put forward a payment proposal to the creditors that allows them to be paid more than they would under the standard bankruptcy order. The official receiver runs the FTVA for the individual if they agree with the proposal. The fast-track individual voluntary arrangement is cheaper than an ordinary IVA as there are set fees and costs.

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. In most cases personal bankruptcy is initiated by the bankrupt individual. Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative impacts of personal bankruptcy, individuals in debt have a number of bankruptcy alternatives.

According to the Office for National Statistics, sole proprietors represented 23.8% of all UK enterprise in 2010. Of that number, more than half a million sole traders were operating via the PAYE or VAT system alone. Sole traders are a distinct legal entity, operating as one type of UK business structure. In the event of financial problems affecting the business, they are subject to different rules to those that govern companies.

Commercial insolvency in Canada

Commercial insolvency in Canada has options and procedures that are distinct from those available in consumer insolvency proceedings. It is governed by the following statutes:

A Personal Insolvency Arrangement (PIA) is Ireland's debt management solution for individuals who want to avoid outright bankruptcy and declare insolvency. The agreement is one of the three alternatives authorized under Ireland's Personal Insolvency Act 2012; Debt Settlement Arrangements (DSA) and Debt Relief Notices (DRN) make the other two arrangements. PIA mandates a legal agreement between a debtor and their creditors, which is mediated and administered by a Personal Insolvency Practitioner (PIP). A PIA usually lasts for a term of six years and must include both unsecured debt and secured debts.

British Virgin Islands bankruptcy law

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

References

  1. "Debtor". Investopedia. Retrieved 2014-08-23.
  2. "Debt: The first 5000 years" (PDF). Unwelcome Guests. Archived from the original (PDF) on 2014-07-04. Retrieved 2014-08-21.
  3. "debt". Dictionary.com. Retrieved 2014-08-27.
  4. "Budgeting and Debt – Types of Debt". Investopedia. Archived from the original on 2014-08-13. Retrieved 2014-08-24.
  5. "Types of Debt". Stepchange. Retrieved 2014-09-04.
  6. "Default". Investopedia. Retrieved 2014-11-12.
  7. "A guide to individual voluntary agreements". McTear Williams & Wood. Retrieved 2014-11-12.
  8. "Debt". Merriam-Webster. Retrieved 2014-11-12.