Creditor

A creditor is a person or organization to whom money, goods or services are owed. Banks that have made a loan, investors who hold bonds, suppliers who have delivered goods on credit, landlords owed rent, employees owed wages and tax authorities owed taxes are all creditors. The party that owes is the debtor, or borrower when the obligation arises from lending.

A creditor holds a claim that is an asset on its own books and one of the liabilities on the debtor's. Every lender is a creditor, but not every creditor is a lender: a supplier extending 30-day payment terms or a customer awaiting a refund is a creditor without having lent anything. The word comes from the Latin credere, "to believe" or "to trust", the same root as credit. In UK accounting, amounts a business owes are often shown as "creditors" on the balance sheet, whereas US statements call them payables.

When someone pays a plumber after the job is done, the plumber is, for a short time, a creditor: the work has been delivered and the money is still owed. When a family takes out a mortgage, the bank becomes its creditor for the next twenty-five years.

Creditors do well when debtors pay on time and badly when they cannot. Because of that, they ask for protections: security over a house or a machine, promises about how the borrower will behave, and rules about who gets paid first if things go wrong. Much of financial law is about balancing what creditors can demand against what debtors can bear.

• Secured creditors. Hold collateral, such as a mortgage over property or a charge over equipment, and can enforce against it if the debtor defaults. A lien is one form of such security.
• Unsecured creditors. Have only a general claim, such as trade suppliers, most bondholders and credit card issuers. They recover less on average after a default.
• Preferential creditors. Given priority by law, such as employees for some unpaid wages and, in several countries, tax authorities.
• Subordinated creditors. Have agreed to be paid after senior creditors in return for a higher interest rate; their position reflects debt seniority.
• Trade creditors. Suppliers who deliver first and are paid later under agreed payment terms.

When a debtor cannot pay its debts, insolvency law decides how the remaining assets are shared. Most systems follow a priority order: secured creditors are paid from their collateral, then the costs of the insolvency process, then preferential creditors, then unsecured creditors, with shareholders last. In the United States, the Bankruptcy Code provides for liquidation under Chapter 7 and reorganization under Chapter 11, where creditors vote on a plan and the "absolute priority rule" generally requires senior classes to be paid in full before junior ones receive anything, unless they agree otherwise.

In the United Kingdom, the tax authority HMRC became a secondary preferential creditor again from 1 December 2020 for certain taxes collected on behalf of others, including VAT and employee income tax deductions, ranking behind employees but ahead of floating-charge holders and ordinary unsecured creditors. Changes like this shift recoveries among creditors and can affect how much banks are willing to lend against floating charges.

Because shareholders enjoy limited liability, creditors of a company can claim only against the company's own assets, not the owners' personal wealth, unless the owners have given personal guarantees. This is one reason creditors watch for asset stripping and include covenants restricting dividends and new borrowing.

Governments borrow from domestic and foreign creditors by issuing bonds and taking loans from banks, other governments and multilateral lenders such as the International Monetary Fund and the World Bank Group, which are often treated as preferred creditors in practice. When a state cannot pay, there is no international bankruptcy court; instead, debt is renegotiated through debt rescheduling or restructuring. Official bilateral creditors coordinate through the Paris Club, founded in 1956, and since November 2020 through the G20 Common Framework, which also aims to involve newer lenders such as China. Bondholders negotiate separately, and collective action clauses in bond contracts let a qualified majority bind holdouts. Disputes such as Argentina's long litigation with holdout creditors after its 2001 sovereign default show how hard coordination can be.

At the scale of whole economies, a creditor nation is one whose residents own more foreign assets than foreigners own of its assets, giving it a positive net international investment position. Countries with persistent current account surpluses, such as Japan, Germany and China, have long been among the largest net creditors, while the United States is the largest net debtor.

Creditor protection shapes credit risk, the price of borrowing and access to finance. Economists find that countries with stronger creditor rights and efficient courts tend to have deeper credit markets, although very creditor-friendly rules can discourage entrepreneurship by making failure costly. Historical rules such as debtors' prisons, and modern debates over odious debt and moral hazard in bailouts, show how the balance between creditors and debtors has shifted over time.

• United States Courts: Bankruptcy basics
• GOV.UK: The Insolvency Service