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An Obligor is an entity or a person who is contractually or legally obliged to offer a payment or benefit to another. In the financial world, this term is referred to a bond issuer who is bound to make principal repayments along with interest payments on the outstanding debt.
The benefit or payment recipient, in such a situation, is known as the obligee.
The most common obligor type is the debt holder. But, along with the required principal and interest repayment, several corporate debt holders are also needed to fulfil additional demands contractually. For a bondholder, these are known as covenants and are highlighted in the first bond issue between the obligee and the obligor.
Covenants, basically, can either be negative or affirmative. A negative covenant is limited in a way that it halts the obligor from doing something, like restructuring the organization’s leadership. An affirmative covenant, on the other hand, is something that the obligor must do, like accomplishing certain performance goals.
Considering that these bond issues are contractual obligations, obligors would have a minimal scope as far as deferring interest payments, principal repayments or evading covenants are concerned. Any non-payment or delay in the payment of interest can be understood as the bond issuer’s Default, which can eventually have huge consequences and ramifications for the continuation of a viable business. This results in most of the bond obligors taking their debt obligations seriously. However, still, overleveraged obligors’ defaults keep occurring from time to time.
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In a personal setting, an obligor is not needed to be the debt holder, irrespective of the type, or the bondholder. Even in personal life, an individual can turn into an obligor. In family law, there is a variety of situations when a court order is given. For instance, in a divorce settlement, one of the parents will be needed to pay support to the child. If a working partner has to pay Rs. 5000 a month to a non-working partner, the former will become an obligor to the latter. In such situations, if there are any changes in the Income or financial status of the obligor, he can file a petition to decrease the Obligation.