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Financial commitments are liabilities for individuals or entities that promise to bear certain expenses, with some having due dates and others ongoing. Businesses, governments, and consumers all make financial commitments, which can result in legal action if not fulfilled.
A financial commitment occurs when an individual or an entity assumes the responsibility of covering certain expenses. Some financial commitments have a due date while others are ongoing, with no specific completion date. Financial commitments are liabilities for the party that promises to bear the cost. Parties that do not comply with such agreements often have to deal with lawsuits or other types of legal action.
When a business first begins operations, the owners of the business enter into a financial commitment to each other and to the business. Some owners may agree to invest a certain amount of money in the business during a particular period of time. Other business owners invest minimal cash but take responsibility for some of the business’s debt liabilities in the event the business becomes insolvent. In many cases, business owners seek financing from lenders, and these lenders make a financial commitment to the business when loan applications are approved. Once the loan is closed, business owners make a financial commitment to pay off the debt.
Government entities use taxpayer funds to pay for education programs, military service, and other types of public services. The initial cost of such programs often exceeds short-term tax revenue, which means that government entities have to borrow funds to cover short-term public expenditures. Government entities in many countries borrow funds in the form of general obligation bonds. These bonds are insured against future tax revenue. This means that the government and taxpayers share the responsibility of paying the debt, so both parties are making a financial commitment to the bondholders.
In addition to businesses and organizations, consumers often willingly or unwittingly make financial commitments. In many nations, there are laws that make parents responsible for covering the basic expenses of their children. 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 be 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 each other. This can result in financial arrangements that have to be worked out when couples get divorced. In some nations, financial obligations extend not only to spouses but also to partners in legally recognized civil unions. The primary beneficiary in a marriage or civil partnership may have to make alimony payments to another partner or spouse after the legal separation takes effect.
Smart Asset.
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