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What Is a Financial Obligation?

Mary McMahon
Updated May 16, 2024
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A financial obligation is a requirement to pay money to another party, such as a lender, landlord, or service provider. Obligations may be fixed or variable, and are an important part of budgeting. Many come with legal ramifications. If a debtor fails to pay, the creditor can take action in a court of law to recover damages, including the amount owed along with additional fees to compensate. Under certain circumstances, debts may be forgiven, usually as part of a bankruptcy proceeding.

Some examples of a financial obligation can include debt service, utility bills, and agreements to pay for products or services. Debts can make up a substantial component of expenses, particularly for people or organizations with large loans. Companies may take on additional legal obligations of this nature in the form of bonds, a type of debt instrument used to finance business activities. The company needs to pay out interest on the bond in addition to preparing to repay the principal when it matures.

People take on a financial obligation when they sign contracts for services provided in exchange for financial consideration. This can include agreements to receive health care, obtain repairs from a mechanic, or order products for delivery. The contract creates a legal relationship that can be used in the event the debtor doesn’t pay or attempts to contest charges. Physicians, for example, can pursue payment for services even if patients didn’t get better, because the financial obligation isn’t contingent on whether the treatment works.

When a financial obligation enters a court of law in a suit, a judge can review the facts of the case and make a determination. The debtor may be compelled to pay and asked to set up a payment plan if it’s not possible to discharge the debt in full. If the contract doesn’t appear to be legal, the creditor didn’t provide the advertised service, or there are other problems, the judge may rule that the debtor is in the right and does not have to pay. Judgments can include the seizure of assets to cover the obligation in some cases.

Budgeting must account for each financial obligation to create an accurate picture of financial circumstances. Money must be set aside to handle ongoing and projected expenses. Some may be tax-deductible, which provides an opportunity to claim them for a reduction in tax liability. Failure to prepare to pay bills can result in delayed payment or non-payment, which could expose people to the risk of being sent to collections.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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