The Difference Between Debtors vs Creditors

We often use jargon in the debt collection industry. Our terminology is intended to clarify our work and draw legal distinctions between our clients and their debtors.

The good news is that most of our jargon is simple to learn. The more you know, the easier it gets to understand our services and your rights as a creditor or debtor.

The difference between a debtor vs creditor is one of the most common questions we get. It’s also the basis of our industry, so we’re going to go over the meaning of each term in this article.

What is a Debtor?

A debtor is an individual or business that owes money to a lender. You are a debtor if you have borrowed money or if you have received goods and services that you haven’t yet paid for.

The most common example of a debtor is an entity that has borrowed money to make a purchase, such as taking out a mortgage with your bank.

Debtors have certain financial obligations. This typically includes repaying the debt according to the agreed upon terms, e.g. paying interest, repaying the debt before a certain date, making regular instalments, etc.

For example, a business that manufactures raw fabric might sell their product to a business that produces clothing. The clothing business may not pay for large shipments of materials up front. Instead, they have a deal with the fabric supplier that allows them to pay in instalments.

In this example, the clothing producer is the debtor of the fabric manufacturer.

What is a Creditor?

A creditor is a company or individual that has lent money to another entity (the debtor). You are a creditor if you have provided loans, goods or services to someone else and they haven’t yet paid. In most cases, this involves entering into an agreement whereby your debtor has to repay the money they owe.

When you think of lending money, you probably think of major banks and lenders. But any individual or business may be considered a creditor. Banks, lenders, businesses, suppliers, service providers, and even friends and family can be creditors.

The major distinction between creditors is the type of debt:

• Secured debt is any debt that is subject to a “security.” With a secured debt, the debtor is able to borrow money by using an asset as collateral. Typically, this means the creditor has a right to repossess the asset if the debtor doesn’t repay the loan.
• Unsecured debt is any debt that isn’t subject to a security interest. Unsecured debts include things like personal loans, credit cards, or goods and services a debtor has received but hasn’t yet paid for.

Secured and unsecured creditors both have a legal right to recover the money they’re owed.

How Creditors Recover Money from Debtors

If you or your business is acting as a creditor and your debtor can’t or won’t repay their debt, you can recover your money in a few ways:

1. Debt Collection

Commercial debt collection is your best chance of receiving payment. Many debtors stop repaying their debts because they’re unable to keep up with the terms of your agreement.

That can put your business in a bad position. If debtors can’t pay, you won’t have the cash you need to meet your own obligations, which can quickly get out of hand. Working with a professional debt collector can help you recover more of your money in less time.

Debt collectors prefer to negotiate payment plans that help the debtor meet their obligation. This allows you to meet your cash flow requirements without damaging the relationships you hold with valuable customers.

2. Legal Action

In Australia, creditors have a legal right to the money they are owed. If a debtor can’t or won’t repay their debt, you may be able to take legal action against them. We strongly recommend pursuing other debt recovery methods if possible. Legal action is complex, and it can be a drawn-out process.

Taking legal action may be the best course of action if there is a dispute between you and your debtor.

3. Bankruptcy

If you are owed $10,000 or more by a private individual, you can apply to the court to make them bankrupt. During bankruptcy, the debtor’s assets will be liquidated, and the creditors will each receive a share of the money.

Bankruptcy is a very inefficient way to recover debts. The Australian Financial Security Authority (AFSA) reports that unsecured creditors receive just 2.23 cents for every dollar they are owed. Bankruptcy should be considered a last resort.

4. Liquidation

If you are owed $4,000 or more by a debtor business, you can apply to the court to have a Liquidator appointed. Similar to bankruptcy, the debtor business will be liquidated, and creditors will be paid a share of the money. Liquidation also provides very low returns to creditors and should be avoided if possible.

Protect Your Business with Debt Recovery from Dynamic Commercial Collections

While you probably think of banks and lenders as “creditors,” there’s a good chance your business acts as a creditor for many of your customers. Playing the role of creditor is a great way to expand your business and build trust, but it can put you in a vulnerable position.

If your business is left holding bad debt then it’s time to contact Dynamic Commercial Collections. Dynamic Commercial Collections offers professional debt recovery services in Brisbane, Bundaberg and Perth. We work with individuals and businesses, providing expert debt collection and field services that maximise your returns.

We take pride in using the latest technology and ethical recovery tactics to collect outstanding debts. That’s good news for your business, and it’s good news for your debtors. Contact us today for a consultation and to find out more about recovering the debts you are owed!