A creditor is someone or something that you owe money to. It can be a real person like a friend or relative, or an entity like a financial institution, credit card issuer, or business. The person who owes money to a creditor is called the debtor. Creditors typically lend money or extend loans, which is why they may also be called the lender.
When a debtor does not make payment, a creditor can collect the debtor's property or bring the debtor to court, depending on the type of debt. Generally, it is easier for creditors to collect on debt secured by collateral, like a house or car, than it is to collect on unsecured debt, like medical debt or credit card debt. Creditors typically have to follow procedures and timelines when filing for claims against a debtor.
Creditors can make claims against a debtor's estate after they have died. The estate executor or personal representative is in charge of managing unpaid debts and taxes, and you can name an executor to handle your affairs in a will. As part of your estate plan, you can shield your assets from future creditors through an asset protection trust.
What is a creditor?
A creditor is someone to whom a debtor owes money. A debtor is the person who holds the debt. If you owe someone money, then you are the debtor. Another way to look at creditors and debtors is as a lender and borrower.
A creditor can be a personal creditor, which means you know them personally. The creditor can also be a real creditor, which is an institution or entity. Creditors often charge the borrower or debtor an interest rate for the money that they lend. When a loan application asks for a list of your creditors, it is another way of assessing what debts you owe.
What is an example of a creditor?
Here are some common creditors you may encounter:
Friend or family member you owe money to
Financial institution, like a bank or credit union, that extends you a personal loan, installment loan, or student loan
Credit card issuer
Mortgage lender
Auto dealer that extends you a car loan
What happens if you can't repay a creditor
When a debtor cannot make repayment to a creditor, what happens next depends on the type of creditor and debt. If you have secured debt, which is backed by a collateral asset, like a house or a car, then the creditor has the right to seize or repossess that asset. A home loan is a common type of secured debt. If you fail to pay your mortgage, the creditor will place a lien on your house and may eventually foreclose on it. Similarly, if you fail to pay your car loan the creditors' rights typically allow them to repossess the car — sometimes without even going to court, depending on the state.
With unsecured debt, creditors must typically sue the debtor in court in order to collect on it. A judgment creditor is a creditor that has won the suit and is legally entitled to collect on the debt by judicial means. This creditor can reclaim payment through wage garnishment and liens, levy money from your bank account, or sell your physical assets to satisfy the debt. It may not be that difficult for a creditor to find a debtor’s bank account and property, since the debtor likely provided this financial information in their loan application.
Creditors may also employ a third-party debt collector to try and recoup payment.
Creditors and bankruptcy
Filing for bankruptcy can prevent or stop creditors from collecting on the debt, but some types of debt can be discharged while others have priority. For example, money owed for child support, alimony, or to the IRS, may not be easily dismissed. Dissatisfied creditors can also file a claim against the debtor in bankruptcy court to try and collect on the judgement even though the debtor has declared bankruptcy. Procedures vary by state and the type of bankruptcy filing. If you have further questions, you should speak with an attorney.
Creditors and estate planning
After someone dies, creditors may go after the decedent's (deceased person's) estate, which is the collection of their assets. Creditors’ claims must be filed with the probate court within a certain window set by the state, which can range from a few weeks to months from receiving notice of the decedent's death or the initial probate proceeding.
The executor named in the decedent's will or a personal representative named by the court is responsible for handling the estate, including paying any debts or taxes the decedent owed. Executors won't pay the creditors out of their own pocket, but through the estate funds, and they'll usually pay more important debts before others. For example, funeral expenses and taxes usually have priority. The executor has many responsibilities after a person dies, so be sure to nominate someone to represent your estate in your last will and testament.
If you're a relative of the decedent and you receive phone calls from their creditors, you can direct them to the executor. You are typically not obligated to pay their debt, except under certain circumstances, like if you co-signed the loan or were a joint account owner.
→ You can learn more in this guide to what happens to a debt after death
