1.1 Key Terms and Concepts

Before we look at the debt settlement process, let’s look at some of the key terms used in this section and their meaning. 

Debtor – a company or individual who owes money. If the debt is in the form of a loan from a financial institution, the debtor is referred to as a borrower, and if the debt is in the form of securities – such as bonds – the debtor is referred to as an issuer. Legally, someone who files a voluntary petition to declare bankruptcy is also considered a debtor.

Debt settlement – an approach to debt reduction in which the debtor and creditor agree on a reduced balance that will be regarded as payment in full. 

Creditor – an entity (person or institution) that extends credit by giving another entity permission to borrow money intended to be repaid in the future. Creditors can be classified as either personal or real. People who loan money to friends or family are personal creditors. Real creditors such as banks or finance companies have legal contracts with the borrower, sometimes granting the lender the right to claim any of the debtor’s real assets (e.g., real estate or cars) if they fail to pay back the loan. 

Credit rating – an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting. The credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency’s analysts. 

Credit reporting (or credit score) – a subset of a credit rating. It is a numeric evaluation of an individual’s credit worthiness, which is done by a credit bureau or consumer credit reporting agency.