Obligor: Definition, Responsibilities, Scenarios, and Types

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.

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.

Key Takeaways

• An obligor is a person or entity who is legally or contractually obliged to provide a benefit or payment to another.
• An obligee is a persona or entity receiving the payments, or who is owed the obligation.
• An affirmative covenant is something that the obligor is required to do, such as hit specific performance benchmarks.
• In family law, there are certain cases when a court order requires one of the parents, the obligor, to pay child support to the other parent.

Understanding Obligors

An obligor is a person who is legally bound to pay another person. 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.

With bonds, 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.

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 does not have to be a bondholder. 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 them an obligor. In situations like this, if there are changes to an obligor's financial status or income, they may petition the court to reduce their 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.

Is the Borrower the Obligor?

In cases of debt, the borrower or the one with the debt is the obligor. They have an obligation to pay the lender or bond issuer, or the obligee. In other cases, an obligor may not have a debt to an obligee, but they may be responsible for paying them, such as in cases of child support.

Who Is the Obligor in a Surety Bond?

With surety bonds, or promises to fulfill debts in default, there are three parties involved. The principal is the obligor. The surety is the party that agrees to pay the bond to the obligee if the obligor defaults. The obligee is typically a government agency.

What Happens When the Obligor of Child Support Dies?

When an obligor of child support dies, they may still be responsible for paying child support through their estate, depending on the laws of the state where they lived.

The Bottom Line

Understanding the difference between obligor and obligee will clarify financial responsibilities. Obligor's owe money to obligees, whether it is due to debt or contractual obligations.

1. American Family Law Center. "Obligor."
2. Nelson Law Group, PC. "Obligor vs. Obligee—Which One Are You?"
3. National Association of Surety Bond Producers. "What Are Surety Bonds?"
4. U.S. Department of the Treasury. "FAQ for New Individual Securities Law."
5. Legal Information Institute, Cornell University. "Child Support."

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