Debtor

Anyone who owes a debt to someone else qualifies as a debtor. These debtors can be individuals, companies, governments or from the justice system. Creditors are the counterparty and are generally referred to as a borrower at financial institutions such as banks.

If a debtor does not meet the scheduled payment in accordance to the signed contract between debtor and creditor or fails to fulfil stipulated conditions, or which was not in accordance with the contract it may result into a default, for which the loan can be called or extra penalties may apply. This agreement of debt is called a loan covenant in a commercial loan and all covenants are agreement granted by the creditor and generally are to ensure that the debtor understands the risk attached to the loan, although debtors regard loan covenants often as an obstacle and restriction, which ultimately result in a better agreement understanding. The creditor’s freedom gets restricted when a debtor imposes restrictions on how they should conduct business and ultimately result in efficiency loss.

Companies often use debt as a part of their overall corporate finance strategies for the maximization of their corporate value whilst managing the financial benefits. Contract being drawn between debtors and creditors enforces debtors to return an equivalent of money or service as signed for. To settle a debt in the given market would be referred to as a standard of deferred payment and generally the U.S. dollar and the euro are accepted standards for international settlements, where as each country individually has their own standard value of payment nationally. The standard of deferred payment should be settled by agreement of contract to avoid selecting a denominator of debt that can not drop in value, as the value of deferred payment also fluctuates as debt is a deferred payment.

To finance its operations, companies require different kinds of debt, namely syndicated and bilateral debt, private and public debt, as well as secured and un-secured debt. When creditors have access of the specific company in debt to them on a proprietary basis, the debt obligation are considered secure. Anything tangible or intangible owned to produce value, is considered an asset which creditors prefer as opposed to unsecured debt. Debt defined in its simplest form should be called a loan, which consists of a contract signed between debtors and creditors for the named amount to be paid back, with interest, by a stipulated time.

Private debt such as Mezzanine debt is a subordinated debt that enables a claim on company’s assets and is classified as unsecured and unsubordinated debt. It is a lot more expensive for a company than secured debt for the much higher capital cost and they are usually private placements, from much smaller companies as they involve much higher risk, which result in Mezzanine debtors to pay back a much higher return. Both the debtor and the creditor will work at avoiding the debtor the full interest cost, as Mezzanine lenders generally require a return of 14-20%, where as public debt has very few restrictions and are freely tradable on public exchange.
Syndicated loans, is given to debtors that involves the high risk of borrowing more money, usually millions, that no-one wishes to extent to a single debtor, thus a syndicate of creditors put together the amount towards the loan. The effective size of the debtors repayment can always differ in regards to, inflation and the exchange rate even when the debtor and creditor uses the same currency.

People from all nations use debt to purchase anything that is to expensive to buy with cash on hand, as well as companies as an investment. Many debtors acquires debt for a specific reason or purpose, like the purchasing of a house or an expensive car at a later stage, however debtors should realize that the written agreements are enforceable, although it is not a crime to fail to pay a debt, creditors does not have to accept lesser offered amounts offered by the debtor and can result in unfortunate incidents and court procedures, which result in the debtor to pay back more than was originally owed to the creditor. Debtors have landed up in jail in a debtor’s prison for failure to pay a debt, although it should be established by a court of law, whether the debtor can afford to pay and also the willingness and co operation of the debtor before going to such extremes.

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