What Is a Financial Commitment?
A financial commitment occurs when an individual or an entity assumes responsibility for covering certain expenses. Some financial commitments have an expiration date while others are ongoing, with no specific end date. Financial commitments are liabilities for the party that promises to assume the cost. Parties that renege on such agreements often have to contend with lawsuits or other types of legal action.
When a business first begins operations, the owners of the business enter into a financial commitment with one another and with the business. Some owners may agree to invest a certain amount of money into the business over a particular period of time. Other business owners invest minimal cash but assume responsibility for some of the business' debt liabilities in the event that the business becomes insolvent. In many instances, business owners seek financing from lenders and these lenders make a financial commitment to the business when loan applications are approved. Having closed on the loan, the business owners assume a financial commitment to repay the debt.
Government entities use taxpayer funds to pay for education programs, the military and other types of public services. The upfront cost of such programs often exceeds short-term tax revenues which means that government entities have to borrow funds to cover short-term public expenses. Government entities in many countries borrow funds in the form of general obligation bonds. These bonds are secured against future tax revenues. This means that the government and the taxpayers share the responsibility for repaying the debt so both parties are entering into a financial commitment with the bond holders.
Aside from businesses and organizations, consumers often willingly or unwillingly enter into financial commitments. In many nations, there are laws that make parents responsible for covering their children's basic living expenses. Separated parents may have to make child support payments and people who refuse may have their bank accounts or paychecks garnished. In some places, children can become emancipated from their parents which means that they no longer have to live with their parents but also that the parents no longer have a financial obligation to their children.
Laws in many nations mean that spouses have a financial obligation to one another. This can result in financial settlements having to be arranged when couples get divorced. In some nations, financial obligations extend not just to spouses but also to partners who are involved in legally recognized civil unions. The primary earner in a marriage or civil partnership may have to make alimony payments to other partner or spouse after the legal separation takes effect.
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