Obligor

What Is an Obligor?

An obligor, also known as a debtor, is a person or entity who is legally or contractually obliged to provide a benefit or payment to another. In a financial context, the term "obligor" refers to a bond issuer who is contractually bound to make all principal repayments and interest payments on outstanding debt. The recipient of the benefit or payment is known as the obligee.

If a covenant is breached by an obligor, the bond may become invalid and require immediate repayment, or it can sometimes be converted to equity ownership.

Understanding Obligors

An obligor is a person who is legally bound to another. Debt holders are the most common types of obligors. However, in addition to the required repayment of interest and principal, many holders of corporate debt are also contractually required to meet other requirements. For a bondholder, these are called covenants and are outlined in the initial bond issue between the obligor and obligee.

Obligor in Corporate Settings

Covenants can be either affirmative or negative. An affirmative covenant is something that the obligor is required to do, such as the need to hit specific performance benchmarks. A negative covenant is restrictive in that it stops the obligor from doing something, such as restructuring the leadership of the organization.

Since these bond issues are contractual obligations, obligors may have very little leeway in terms of deferring principal repayments, interest payments or circumventing covenants. Any delay in payment or non-payment of interest could be interpreted as a default for the bond issuer, an event that can have massive repercussions and long-term ramifications for the continuing viability of the business. As a result, most bond obligors take their debt obligations very seriously. Defaults by overleveraged obligors do occur from time to time.

Obligor in a Personal Setting

An obligor is not required to be a bondholder or a holder of some other form of debt. Someone can become an obligor in his personal life, too. In family law, there are certain cases when a court order is handed down — in a divorce settlement, for example — that requires one of the parents to pay child support to the other parent. If a working spouse is told by the courts to pay the non-working spouse $500 a month, the monthly payment will make him an obligor. In situations like this, if there are changes to an obligor's financial status or income, he may petition the court to reduce his monthly obligation.

Otherwise, even if the obligor loses their job, the payments remain due and cannot be discharged in bankruptcy like other civil judgments. If an obligor falls behind on court-ordered payments, such as child support, it can lead to problems, such as wage garnishment, loss of driver's licenses, and other problems. It is important that an obligor parent pay what is owed, and make an effort to change child support amounts when there is a change in income of either parent.