Creditor: who are creditors and debtors? Meaning and types

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A creditor is one of the most influential characters in a money transfer process, where both parties must generate necessary agreements in order to give legality to any financial action. This model is present in any entity of this type, such as banks or insurance agencies.

Next, we will know some of the most important elements about what these types of financial shareholders suggest when presenting a money transfer, such as its concepts, types, among others.

What is a creditor: meaning

What is a creditor: meaning

A creditor is a term used in accounting to describe an entity (it may be a person, an organization or a government agency) to which money is owed, since it has provided goods or services to another entity.

Sometimes, this entity will charge interest on the money borrowed as a way to generate profits. These could be interest on the payment of bank loans or credit card payments.

Examples of creditors:

  • Commercial creditors: money you owe to suppliers.
  • Loan from a bank or entity.

A creditor, as we say, could be a bank, a provider or a person who has provided money, goods or services to a company and expects to be paid on an agreed date. In other words, the company owes money to its creditors and the amounts must be recorded in the company’s balance sheet as a current or non-current (or long-term) liability.

We see that the relationship between creditor and debtor is quite similar to the relationship that we can appreciate between customer and supplier, since any individual can be both a supplier and a customer, so that a debtor can be a creditor at the same time and vice versa.

The total amounts directed to these entities are reported in a balance sheet of companies or companies as “liabilities”. The vast majority of these total amounts are reported and classified into two main groups: non-current liabilities (or also called long-term) and current liabilities.

Types of creditors

Types of creditors

There are three different types of creditors. They are the following:

  • Secured creditors: A person who has a mortgage, lien, burden, pledge or privilege against an asset of the person in bankruptcy as collateral for a pending debt. This type of creditor is generally not affected by a bankruptcy or proposal.
  • Unsecured creditors: These creditors are entitled to the remaining assets after the payment of the secured creditors. Many debts such as credit cards, personal lines of credit or overdrafts fall into this category. These creditors are not guaranteed reimbursement.
  • Preferred Creditors: Although preferred creditors are not guaranteed, they are paid first. Funeral expenses in the case of a person who died in bankruptcy are generally a preferred claim. This also includes unpaid wages, commissions, compensation of an employee of a debtor and obligations to support a spouse or a child.

Let’s see some examples…

Some creditors, such as banks and other lenders, have lent money to the company and will require the company to sign a promissory note in writing for the amount due. When a promissory note is required, the company that borrows the money will record and report the amount due as Promissory Notes.

If the creditor is a seller or supplier that did not require the company to sign a promissory note, the amount due is likely to be reported as Accounts Payable or Accumulated Liabilities.

Other creditors include company employees (to whom wages and bonuses are owed), to governments (to which taxes are owed) and to clients (who made deposits or other prepayments).

Some creditors are called secured creditors because they have a lien inscribed on some of the company’s assets. A creditor without a lien (or other legal claim) on the company’s assets is an unsecured creditor.

Debtor-Creditor Relationship

Debtor-Creditor Relationship

When talking about debtor and creditor, reference is made to the relationship between two people, in which one, the debtor, may be obliged to provide services, money or goods to the other, the creditor. This relationship can be created by the fact that the debtor does not pay damages to the injured party or does not pay a fine to the community; However, the relationship generally implies that the debtor has received something from the creditor, in exchange for which the debtor has promised to make the payment at a later time.

If the debtor does not make the payment within the deadline or within a commercially viable term, and if the routine debt collection efforts are unsuccessful, then a lawyer can begin a formal collection process. Sometimes it is possible to seize the property, wages or bank account of the debtor as a means to force payments.