What Are the Differences Between Creditors and Debtors?

Article Summary:

A creditor is a person or entity who lends money, while a debtor is a person or entity who owes money. In exchange for lending money to a debtor, the creditor sets repayment terms on the borrowed money, and the debtor may have to pay interest. Sometimes debtors are not able to pay the money they owe, so debtors and creditors have to work together to resolve the issue. This could involve refinancing a loan, debt consolidation, debt settlement, tax relief, or bankruptcy proceedings.

As much as we would all like to pay cash for every purchase we make, most of us end up borrowing money at some point. Maybe it’s for a new car, a mortgage for a home, or a student loan for a college degree. In any case, as soon as you sign on the dotted line, you become a debtor who owes money to a creditor.

Small businesses and other entities also play the roles of debtors and creditors when they lend or receive money, raw materials, or other goods and services. While the roles of debtors and creditors are different, they do have to work together, especially when the borrower needs help paying the owed money. Let’s look into the roles debtors and creditors play and how they can compromise if needed.

Difference between a debtor and a creditor

In the simplest terms, a debtor borrows money, and a creditor loans money. Usually, the creditor will conduct some kind of assessment or underwriting procedure to determine whether or not the debtor qualifies for a loan, and they may charge interest on that borrowed money. The creditor will also offer certain terms, such as installment payments, which the debtor can then decide to accept. There is usually some kind of consequence if the debtor fails to repay the loaned money, such as a repossession.

What is a creditor?

A creditor can be a person — for example, when you loan money to a friend, you become a creditor. Other creditors who issue loans to borrowers include banks, credit unions, and other financial institutions. A creditor can also be a business that provides goods, services, or money to people or other companies with the expectation of being paid back.

What is a debtor?

Conversely, a debtor receives goods, services, or money from a creditor. A debtor could be a person or some other entity, such as a business. Debtors are responsible for repaying any debt they take on according to the terms agreed upon with the creditor.

Can you be a creditor and a debtor at the same time?

Yes, this is a fairly common scenario. For example, some businesses sell products and invoice customers for payments, which makes them creditors until those invoices are paid. On the other hand, these companies purchase wholesale supplies and have their own invoices to pay, which also makes them debtors.

What are trade debtors and trade creditors?

A trade debtor is a customer who has not paid for goods or services yet. The money owed is referred to as accounts receivable or trade receivables. For example, if one business loaned another business capital, that would appear as a trade receivable on the company’s balance sheet.

The other side of that coin is the trade creditor. Trade creditors have supplied goods or services but have not been paid yet. A successful business owner must keep track of cash flow issues to ensure they do not owe money or that a debtor does not owe money to them. That’s where a good bookkeeper comes in.

How creditors and debtors can work together

In a perfect world, everyone would pay their debts on time and the people or entities owed money would get it back with no issues. But we all know that’s far from reality.

Sometimes borrowers get in over their heads and can’t make their payments, in which case they need to find alternative ways to pay their debts. The following are some ways that debtors and creditors can work together to resolve this issue:


Whether you have an auto loan or a mortgage (including a jumbo one), you can probably seek to refinance your loan if you are struggling with your current terms. You and the creditor may be able to agree on some other more favorable term, such as a longer term with a lower monthly payment or a lower interest rate.

Many people find that once they graduate and enter the working world, they struggle to pay back their student loans. If you’re in this situation, you can use SuperMoney’s tool to compare student loan refinance rates.

Debt consolidation

If you find yourself overwhelmed by multiple debts, you might want to consider debt consolidation. This is the process of combining your existing debts into one loan. Instead of making multiple payments each month to various creditors, you’ll make a single payment at a lower overall interest rate.

There are some benefits and drawbacks to consider before you get a debt consolidation loan:


Here is a list of the benefits and drawbacks to consider.

  • Lower interest rates. A lower interest rate can help you save money and get out of debt faster.
  • A single payment. Instead of having to make multiple payments, you only have to remember to make one payment.
  • Higher credit score. A debt consolidation loan can help you improve your credit score if you use it to pay off credit card debt.
  • Potential for more debt. You may be tempted to borrow more once your credit cards are no longer maxed out.
  • Possible higher total. If you can’t get a loan with a lower interest rate or if the term of the new loan is longer, you could end up paying more in the long run.
  • Prepayment fees. Some lenders charge a fee if you pay off the loan balance early.

Debt settlement

Debt settlement is an opportunity for a debtor and creditor to negotiate new terms when the original loan has become unmanageable. The process of settling debt involves the debtor negotiating with the creditor to pay less than the full amount they owe.

Typically, the option to seek a settlement is available to debtors whose debt has become so overwhelming that they won’t realistically be able to repay it all. This option allows creditors to recoup at least some of their owed money. Some common causes of overwhelming debt that can lead to a debt settlement include:

  • Significant credit card debt
  • Utility bills
  • Medical bills
  • Past-due rent

Pro Tip

Many people who have a large amount of student loan debt may be eligible for student loan forgiveness, so they are no longer required to pay back all or part of a loan. Contact your loan servicer if you think you might qualify for loan forgiveness, cancellation, or discharge.

Should I hire a debt settlement company?

When it comes to debt negotiation, you can hire a debt settlement company or do it yourself. You will have to pay fees if you hire a debt settlement company, but because they specialize in this kind of work, they may be able to get you a better deal than you could get on your own.

Pro Tip

Debtors do have rights when dealing with creditors. The Fair Debt Collection Practices Act (FDCPA) states that debt collectors are not allowed to call you between certain hours, call you at work without your permission, or harass you.

Tax relief

Many people end up owing back taxes and need to negotiate with the IRS — a creditor that we all know doesn’t mess around. You may be able to settle your debt, though, with an offer in compromise, which allows you to pay less than the full amount you owe.

You can also seek help from a tax relief company. These companies charge hefty fees and may require you have a minimum amount of debt before they help you, but depending on your situation, it can be worth having professionals in your corner.


If all else fails, debtors may choose to file for bankruptcy. This is a legal proceeding in which the debtor tries to discharge their debts. Depending on which type of bankruptcy you choose (Chapter 7, Chapter 11, or Chapter 13), you may be able to get a payment plan, liquidate assets, reorganize your debt, or discharge your debt completely.

However, there are multiple downsides to filing for bankruptcy. You’ll have to cover filing fees and attorney costs, and bankruptcy proceedings will stay on your record for seven to ten years. Considering the long-term damage it can wreak on your finances and credit score, bankruptcy should be considered as a last resort after you’ve exhausted all your other options.

Pro Tip

If you are struggling to pay back any money you owe, you may want to seek help from a credit counselor. You can choose to work with a credit counseling company or a free non-profit agency that can help you formulate a debt management plan.


Is a customer a creditor or debtor?

A customer is a debtor, as they owe money to a business (the creditor) for goods or services they purchased.

What is an example of a creditor?

When an individual goes to a bank to take out a personal loan, the bank would be the creditor because they are the party extending credit.

What is an example of a debtor?

Following the same example, the person taking out the personal loan would be the debtor because they are the party who must pay back the debt.

Is a creditor an asset?

No, a creditor would be shown as a liability on a business’s balance sheet, while a debtor would be shown as an asset until they pay off the money they owe.

Key Takeaways

  • A debtor is a person or entity who borrows money, and a creditor is a person or entity who loans money.
  • Debtors and creditors can be people, businesses, or banks and other financial institutions.
  • Before they extend credit, creditors typically assess debtors for their ability to pay back the debt, then set up terms for repayment and interest.
  • When debtors have trouble repaying their creditors, both parties need to work together to reach a solution. This could take the form of refinancing, debt consolidation, debt settlement, tax relief, or bankruptcy.
View Article Sources
  1. What Are Trade Debtors and Trade Receivables? – Accounts & Legal Consultants Ltd
  2. Consumer Credit – Federal Reserve
  3. Student Loan Forgiveness – Federal Student Aid
  4. Fair Debt Collection Practices Act – Federal Trade Commission
  5. Offer in Compromise – IRS.gov