What Is the Relationship between a Debtor and a Creditor?

Geri Terzo

There are many different individuals, businesses, and parties that make the financial system operate. Among those parties are creditors and debtors. A creditor is one who extends or lends money to an individual, business organization, or government, while a debtor is the one doing the borrowing. The relationship between a debtor and a creditor can be positive if everyone follows the terms that were agreed upon at the onset of the contract, but it doesn't take too much for sentiment to turn negative if one party fails to hold up the bargain.

A debtor borrows money, and a creditor lends money.
A debtor borrows money, and a creditor lends money.

A retailer and supplier may represent a debtor and a creditor relationship. While it is the function of a retail outlet to sell merchandise to customers, business activity would not be possible without a supplier to provide the inventory. New retail and supplier relationships are developed every day as product developers seek to obtain the greatest distribution possible. Upon delivery, a retailer may sign a contract for new merchandise, and the supplier will likely mail a bill to the business at a later date. Debtors and creditors in a retail situation may agree to some incentives, such as discount pricing, in exchange for placing orders of a certain size.

Banks may loan money to creditors to purchase a house.
Banks may loan money to creditors to purchase a house.

In the financial markets, a debtor and creditor relationship may exist. Bonds are issued by corporations, governments, and municipalities. Issuers are considered debtors, and investors who buy the bonds, which are debt instruments, are considered the creditors.

It is the responsibility of the debtor to repay a creditor according to terms that include a duration of repayment, an interest rate tied to the credit worthiness of the debtor, and the principal amount of the loan. In this scenario, the relationship between a debtor and a creditor is one that is senior to a debtor's relationship with equity holders. For instance, if an issuer becomes insolvent and files for bankruptcy protection, a bondholder is a creditor that holds seniority for repayment over stockholders.

Banks and consumers may also establish a relationship based on debt. The consumer and bank represent a debtor and a creditor, respectively, in this situation. The lender extends a loan or a line of credit for a certain amount, and the borrower agrees to repay those funds according to terms outlined in a contract. In the event that payments lag or stall, there are likely consequences for the debtor, such as fees and blemishes that appear in that consumer's credit history.

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