Creditor and debtor: Understand the difference!

You've probably seen the terms "creditor" and "debtor" used, especially when it comes to debts. They're always used when it comes to debts to be repaid and can be confusing.

In this article, we'll show you the concepts behind both terms, as well as explain how they work in practice when it comes to debt.

Read on to learn more about what a creditor and a debtor are and the legal implications of each.

What is the difference between a creditor and a debtor?

Now answering the main question of this matter, the main difference between creditor and debtor is that the creditor is the person or entity that provides a credit, while the debtor is the person or entity that receives this credit.

In other words, the creditor is the one who has the right to receive a value or something, while the debtor is the one who has the obligation to pay a value or something to the creditor.

In practice, the relationship between creditor and debtor is common in various contexts, such as:

• Financial loans: the creditor is the bank or other financial institution that lends money to the debtor, who must repay the amount borrowed with interest.
• Installment purchases: the debtor is the consumer who purchases a product or service on credit, and must pay the total amount of the purchase with interest.
• Service provision contracts: the debtor is the contractor who hires the services of a provider, who must receive the agreed amount for the service provided.

The relationship between creditor and debtor is regulated by the Brazilian Civil Code, which establishes the rights and obligations of each party.

The main characteristics that differentiate creditor and debtor are:

• Right: the creditor has the right to receive an amount or something, while the debtor has the obligation to pay an amount or something to the creditor.
• Obligation: the creditor has no obligation to the debtor, while the debtor has an obligation to pay the creditor.
• Risk: the creditor assumes the risk of not receiving what he is entitled to, while the debtor assumes the risk of having to pay what he is unable to pay.

What is a creditor?

A creditor is a party to a financial transaction or contract that has a claim against another party.

Simply put, a creditor is the one who is owed something, usually cash, due to a loan, commercial agreement, or contract. This relationship establishes an obligation for the debtor to fulfill the agreed payment or performance.

For example, in a lending context, the creditor is the entity lending money, while the debtor is the one who receives the money and assumes the responsibility of returning it with interest or under specific conditions.

Financial institutions, suppliers, investors, and other individuals or entities may act as creditors in a variety of situations.

The creditor has a legal right to seek fulfillment of the obligation from the debtor and, in the event of non-payment, may resort to legal measures to protect his interests.

Some examples of creditor

Want to understand in practice who creditors might be? Here are some examples of entities that could be creditors of a debt:

• Financial Institutions: Banks, credit unions, and other financial institutions that provide loans to individuals or businesses. When a customer obtains a loan, the bank becomes the lender, and the customer is the borrower.
• Suppliers: Companies that provide goods or services on credit. If one company delivers products to another with the condition of later payment, the supplier becomes the creditor, and the company receiving the products is the debtor.
• Investors: Individuals or entities that invest money in projects, businesses, or financial securities. Investors become creditors, expecting a financial return on their investments.
• Consumer Credit Institutions: Companies that offer credit for the purchase of consumer products, such as appliances, electronics, etc. In these transactions, the company providing the credit acts as the creditor, and the consumer is the debtor.
• Government: Loans granted by governments to other countries or government entities. In this case, the lending government is the lender, and the receiving government is the borrower.
• Mortgage Lenders: Banks or financial institutions that provide loans for real estate purchases. When someone finances the purchase of a home, the bank becomes the lender with a mortgage on the property.
• Unsecured Creditors: Individuals or businesses that have unsecured claims in the event of bankruptcy. If a business goes bankrupt, unsecured creditors have less collateral than secured creditors, such as mortgage holders.

And what is a debtor?

The debtor is the party to a financial transaction or contract that assumes an obligation to pay or perform a service to the creditor.

In other words, the debtor is the one who owes something to the creditor, be it money, goods or services, according to the terms established in the contract or agreement.

When a person borrows money or purchases goods, he becomes the debtor, that is, the one who needs to pay for the debt incurred or the product purchased.

Some examples of debtors

Now, see examples of situations in which a person or entity may be considered a debtor, including:

• Personal Loans: An individual who takes out a loan from a financial institution assumes the position of debtor. They are obligated to repay the loan amount plus interest according to the agreed terms.
• Credit Purchases: When a consumer purchases goods or services on credit, they become the debtor. The obligation is to pay the full amount or in installments, as established in the contract.
• Commercial Contracts: Companies that receive goods or services with the promise of future payment are considered debtors to their suppliers.
• Real Estate Financing: A person who finances the purchase of a home through a mortgage loan is the borrower. The property purchased serves as collateral for the loan repayment.
• Business Debts: Companies that take out loans for expansion, investment, or current operations become debtors to financial institutions.
• Contractual Payments: When a contract establishes specific obligations, the party responsible for making the payments is considered the debtor.
• Government Debts: Countries or government entities that borrow or issue bonds are subject to becoming debtors to creditors.

What is a debit account? What is a credit account?

Another very common term we encounter that also raises questions is creditor account and debit account. Do you know what they are?

In accounting, the concept of debit and credit accounts plays a fundamental role in representing and tracking a company's financial transactions.

In simple terms, a debit account is one with a debit balance, that is, a negative amount. They represent the use of resources, such as purchases of goods and services, and payment of expenses and obligations.

On the other hand, a credit account has a credit balance, that is, a positive value, representing the source of resources, such as sales of goods and services, receipt of revenue and credits.

See some examples of Debtor and Creditor Accounts:

• Debtor Accounts: Assets: cash, bank, inventory, accounts payable, expenses, costs. Liabilities: accounts receivable, accounts receivable, revenue.
• Creditor Accounts: Assets: property, plant and equipment, intangible assets, and equity. Liabilities: share capital, capital reserves, profit reserves, loans, and financing.

The nature of an account can be identified through its group in the balance sheet.

Asset and expense accounts are debit accounts, while liability, equity, and revenue accounts are credit accounts.

For example, the “cash” account, classified in the asset group, is a debit account, indicating that the accounting record is debited when the company receives cash.

Similarly, the "sales" account, belonging to the revenue group, is a creditor. This means that when a sale is made, the accounting record is credited to the "sales" account.

These accounts are crucial for the accurate recording of accounting transactions, providing accountants with the ability to track the flow of funds within the company.

This tracking is vital for making informed financial decisions, allowing a clear understanding of the organization's financial health and ensuring compliance with established accounting practices.

Furthermore, debit and credit accounts are the backbone of accounting, facilitating effective and strategic financial management of companies.

Creditor and debtor according to the Brazilian civil code

The relationship between creditor and debtor is regulated by the Brazilian Civil Code, which establishes the rights and obligations of each party.

The creditor is the person or entity that has the right to receive an amount or something, while the debtor is the person or entity that has the obligation to pay an amount or something to the creditor.

The Civil Code defines the creditor as “the person who has the right to the performance” (art. 233) and the debtor as “the person who has the obligation to perform” (art. 234).

According to the law, these are the rights and obligations of the creditor:

• Right to demand compliance with the obligation: the creditor has the right to demand that the debtor fulfill the obligation he has assumed.
• Right to receive the amount due: the creditor has the right to receive the amount owed by the debtor, with interest and monetary correction, if applicable.
• Right to collect from the debtor: the creditor has the right to charge the debtor if the latter does not fulfill the obligation.

Likewise, these are the rights and obligations of the debtor:

• Obligation to fulfill the obligation: the debtor has the obligation to fulfill the obligation he has assumed, in the manner and within the agreed period.
• Obligation to pay the amount due: the debtor has the obligation to pay the amount due to the creditor, with interest and monetary correction, if applicable.
• Obligation to bear the consequences of default: the debtor is responsible for non-fulfillment of the obligation and may be held civilly and even criminally liable.

The relationship between creditor and debtor is established by a contract or other legal instrument that defines the obligations of each party.

The creditor can be an individual or a legal entity, while the debtor can also be an individual or a legal entity.

The relationship between creditor and debtor may be of a civil, commercial or labor nature.

Frequently asked questions:

[faq]