What Is an Obligor?
Let me explain what an obligor is. An obligor, which you might also hear called a debtor, is a person or entity that's legally or contractually required to provide a benefit or payment to someone else. In finance, this term specifically points to a bond issuer who's bound to handle all principal repayments and interest on their debt. The one receiving these payments is the obligee.
Understanding Obligors
You need to know that an obligor is someone legally bound to pay another person. The most common examples are debt holders. But beyond just repaying interest and principal, many corporate debt holders have additional requirements. For bondholders, these are covenants detailed in the original bond agreement between you as the obligor and the obligee.
Obligor in Corporate Settings
In corporate environments, covenants come in two types: affirmative and negative. An affirmative covenant means you, as the obligor, must do certain things, like meeting specific performance targets. A negative covenant restricts you from actions, such as changing the organization's leadership structure.
These bond issues are strict contractual obligations, so you have little room to delay principal repayments, interest payments, or avoid covenants. Any delay or non-payment of interest could count as a default, leading to major repercussions that affect the business's long-term survival. That's why most bond obligors treat their duties seriously, though defaults happen occasionally with overleveraged ones.
Remember, if you breach a covenant as an obligor in a bond, the bond might become invalid requiring immediate repayment, or it could convert to equity ownership.
Obligor in a Personal Setting
An obligor isn't always a bondholder. In family law, courts might order one parent—the obligor—to pay child support to the other. For instance, if a court requires a working spouse to pay $500 monthly to a non-working one in a divorce, that makes them the obligor. If your financial situation changes, you can petition the court to lower the amount.
Even if you lose your job, these payments stay due and can't be discharged in bankruptcy like other judgments. Falling behind on court-ordered payments, like child support, can result in wage garnishment, loss of your driver's license, or other issues. As an obligor parent, you must pay what's owed and seek changes when income shifts for either parent.
Is the Borrower the Obligor?
In debt situations, yes, the borrower or the one with the debt is the obligor. You have to pay the lender or bond issuer, who is the obligee. In other cases, you might not have a debt but still owe payments, like in child support.
Who Is the Obligor in a Surety Bond?
With surety bonds, which are promises to cover debts if there's a default, there are three parties. The principal is the obligor. The surety agrees to pay the obligee if you default. The obligee is usually a government agency.
What Happens When the Obligor of Child Support Dies?
If you as a child support obligor die, you might still owe payments through your estate, depending on the state's laws where you lived.
The Bottom Line
Grasping the difference between obligor and obligee clears up financial responsibilities. As an obligor, you owe money to obligees, whether from debt or other contracts.
Key Takeaways
- An obligor is a person or entity legally or contractually obliged to provide a benefit or payment to another.
- An obligee is the person or entity receiving the payments or owed the obligation.
- An affirmative covenant requires the obligor to do something, like hit specific performance benchmarks.
- In family law, a court might require one parent, the obligor, to pay child support to the other.
