Debtor definition

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What is a Debtor?

A debtor is an individual or entity that owes money to a creditor. The concept can apply to individual transactions, so that someone could be a debtor in regard to a specific supplier invoice, while being a creditor in relation to its own billings to customers. Even a very wealthy person or company is a debtor in some respects, since there are always unpaid invoices payable to suppliers. The only entity that is not a debtor is one that pays up-front in cash for all transactions. Thus, an entity could be a debtor in relation to specific payables, while being flush with cash in all other respects.

When is a Debtor in Default?

A debtor is considered to be in default if it does not pay a debt within the payment terms of the debt agreement. Thus, a short payment or late payment could trigger a default. In a default situation, the creditor may be legally able to accelerate payment of the associated debt.

When to Record a Debt

In a situation where there is a possibility, but not a probability, of a liability, there is no liability to record. This means that the person or entity to which the event applies is not considered a debtor until such time as the liability becomes probable and it is possible to estimate the amount of the loss.

When is a Liability Discharged?

The liability owed by a debtor can be discharged in bankruptcy, or with the agreement of the counterparty. In either case, if the liability is no longer valid, the entity involved is no longer a debtor in relation to that liability.

Examples of a Debtor

Here are several examples of debtors:

  • Debtor as borrower. Gregory Company borrows $100,000 from Big Bank. Gregory is considered a debtor until such time as it pays the $100,000 loan back to Big Bank or settles the debt in some other manner.

  • Debtor due to trade credit. Franklin Company purchases $4,000 of goods from a supplier on credit. Until Franklin pays the supplier the amount owed, Franklin is classified as a debtor.

Terms Similar to Debtor

A debtor is also known as a borrower when the term used in relation to a loan. A debtor who issues bonds is known as the issuer.