Debtor vs. Creditor

Debt and credit are critical aspects of personal finance. One term that comes up frequently in discussions around debt and credit is a debtor. A debtor is a person or company that owes money to someone else, usually referred to as a creditor. This article will help you understand what a debtor is and how it differs from a creditor.

Debtor Definition

A debtor is a person or company that owes money to someone else. In most cases, debtors owe money to financial institutions like banks or other individuals. When the money owed is in the form of a loan from a bank, the debtor is known as a borrower. Conversely, if the debt is in the form of securities like bonds, the debtor is known as an issuer. It's worth noting that someone who files for bankruptcy voluntarily is also referred to as a debtor.

Debtor vs. Creditor

While a debtor owes money to someone else, a creditor is the opposite. A creditor is a person or entity that extends credit to debtors. This extension of credit is usually in the form of a loan that must be repaid with interest or other fees. Creditors can be individuals or companies, and they make money off the interest charged on loans to debtors.

Legal Ramifications of Not Paying Debts

While it is not a crime to fail to pay a debt in Canada, debtors who fail to meet the terms of their debt may face fees, penalties, and a drop in their credit score. In some cases, a creditor may take a debtor to court for failure to pay, which may lead to liens or encumbrances. It's important to note that debtors cannot be sent to jail for unpaid consumer debts like credit cards. However, debtors can be sent to jail for unpaid child support or taxes.

Laws Protecting Debtors

In Canada, the Bankruptcy and Insolvency Act (BIA) governs the filing of bankruptcy and consumer proposals. The BIA also outlines the protection of debtors by allowing them to keep certain assets while going through bankruptcy. Additionally, debtors are also protected by the Fair Debt Collection Practices Act (FDCPA), which outlines when and how bill collectors can contact them. The FDCPA only applies to third-party debt collection agencies and not the creditors themselves.

Recourse for Creditors

Creditors who are not paid can take various steps to collect their money. In cases where the debt is backed by collateral like car or home loans, the creditor can repossess the collateral. In other cases, the creditor may take the debtor to court to garnish their wages or secure another type of repayment order.

Understanding the difference between a debtor and a creditor is essential when dealing with loans and credit. Knowing your rights and obligations as a debtor can help you navigate the complexities of finance and make informed decisions.