Financial obligations are legally binding duties to pay money to another party, and they generally fall into four groups: debts you voluntarily take on, taxes imposed by law, payments a court orders you to make, and recurring household costs tied to services you use. Each type is enforceable, and each carries real consequences if you fall behind, from damaged credit to wage garnishment and asset seizure.
Debts You Sign For
Contractual debts arise when you voluntarily agree to borrow money or use credit. The agreement—a promissory note for a home, a credit card application, an auto loan contract—spells out the amount, the interest rate, and the repayment schedule. Your legal duty to repay begins the moment you receive the funds or start using the credit line.
A mortgage is one of the most common. When you finance a home, you sign a security instrument (called either a mortgage or a deed of trust, depending on the state) that gives the lender the right to foreclose if you stop paying, along with a promissory note that is the actual promise to repay. Auto loans work similarly: fixed monthly payments over a set term, with the lender holding a lien on the vehicle until the balance is cleared.
Credit cards create a revolving obligation, meaning the balance moves up or down based on what you charge and pay each month. Rates vary dramatically. A 30-year fixed-rate mortgage averaged roughly 6% as of early 2026, while credit card interest averaged close to 20%, and some cards charge well above that.
The common thread is signed consent. You agreed to the terms, and that agreement is enforceable in court. If you co-sign a loan for someone else, you take on the same obligation as the primary borrower. Federal regulations require the lender to give you a separate notice before you co-sign, warning that the creditor can collect the full debt from you without first going after the borrower, and can use the same collection tools—lawsuits, wage garnishment—against you.1eCFR. 16 CFR 444.3 – Unfair or Deceptive Cosigner Practices
Taxes You Owe by Law
Tax obligations do not require your signature. They are imposed by federal, state, and local law, and they attach automatically when you earn income, receive investment profits, or own property.
Income and Payroll Taxes
Federal income tax is set out in Title 26 of the United States Code, which requires individuals to pay tax on taxable income under a graduated rate structure.2Office of the Law Revision Counsel. 26 USC Subtitle A, Chapter 1, Subchapter A – Determination of Tax Liability On top of that, payroll taxes fund Social Security and Medicare. Social Security is 6.2% for employees and 6.2% for employers; Medicare is 1.45% each. Employees earning more than $200,000 in a calendar year owe an additional 0.9% Medicare tax on earnings above that threshold.3Internal Revenue Service. Topic No. 751 – Social Security and Medicare Withholding Rates
Social Security tax only applies up to a wage cap that adjusts each year. For 2026, that cap is $184,500.4Social Security Administration. Contribution and Benefit Base Wages above that amount are not subject to the 6.2% Social Security tax. Medicare tax has no such cap.
Property Taxes
Property taxes are a local obligation tied to owning real estate or, in some jurisdictions, certain personal property like vehicles or business equipment. Local governments assess the value and charge a percentage to fund schools, roads, and public services. Unlike debts that end when you finish paying them off, property tax continues for as long as you own the asset, and the obligation exists by operation of law rather than by any agreement you signed.
Court-Ordered Payments
Court-ordered obligations differ from voluntary debts and taxes because a judge imposes them after a legal proceeding. You owe the money whether or not you agreed to the arrangement.
Child support is the most familiar example. Under the federal Child Support Enforcement Act, every state operates a program to locate noncustodial parents, establish paternity, and collect payments.5Office of the Law Revision Counsel. 42 USC Chapter 7, Subchapter IV, Part D – Child Support and Establishment of Paternity Judges set the amount using income guidelines, and the obligation runs until a court changes it or the child reaches the age specified in the order. Alimony works similarly, with a court ordering one former spouse to pay the other based on factors like the length of the marriage, each party’s income, and financial need.
Courts also impose obligations through restitution orders and civil judgments. In a criminal case, a judge can order a defendant to repay the victim for losses caused by the crime.6Office of the Law Revision Counsel. 18 USC 3663 – Order of Restitution In a civil lawsuit, a court may award damages after finding one party harmed another. These payments are backed by the court’s enforcement power, which can authorize wage garnishment or asset seizure.
If your circumstances change significantly, you can petition to modify the amount. Courts generally require a substantial change—major income shift, job loss, serious medical condition—that was not anticipated when the order was issued. Until a judge formally changes the order, you remain liable for the original amount even if you believe it is no longer fair.
Recurring Household Bills
Everyday household costs are technically contractual, but they behave differently from large one-time loans because they recur and are tied to basic necessities. When you sign up for electricity, water, or natural gas, you agree to pay for whatever volume you use each billing cycle. You can cancel service, but you still owe for usage already incurred.
Insurance premiums for health, auto, and homeowners coverage are another recurring obligation. You pay a regular fee to keep the policy in force; if you stop, coverage lapses and you carry the financial risk yourself. Monthly premiums range from under $100 for a basic auto policy to well over $1,000 for comprehensive health coverage, depending on the type and your circumstances.
Lease and rental agreements lock in a fixed monthly payment for the right to live in a property. Unlike a mortgage, a lease builds no equity, and breaking it early typically triggers penalties or an obligation to keep paying rent until the landlord finds a replacement tenant.
What Happens When You Don’t Pay
Ignoring a financial obligation does not make it disappear. Creditors, courts, and government agencies have powerful collection tools, and the consequences compound.
Wage Garnishment
For ordinary consumer debts like credit cards and medical bills, federal law caps garnishment at the lesser of 25% of your disposable earnings or the amount by which your weekly pay exceeds 30 times the federal minimum wage.7Office of the Law Revision Counsel. 15 U.S. Code 1673 – Restriction on Garnishment Child support orders allow steeper garnishment: up to 50% of disposable earnings if you support another spouse or child, or 60% if you don’t, with an extra 5% if payments are more than 12 weeks overdue.8U.S. Department of Labor. Fact Sheet 30 – Wage Garnishment Protections of the Consumer Credit Protection Act Federal and state tax debts are exempt from the 25% cap entirely, so the IRS and state agencies can take a larger share.
Liens and Asset Seizure
When a creditor wins a court judgment, it can become a lien on your property, attaching to your home or other assets so the debt must be paid before you can sell them free and clear. A federal judgment lien lasts 20 years and can be renewed for another 20.9Office of the Law Revision Counsel. 28 U.S. Code 3201 – Judgment Liens The IRS can file a federal tax lien for unpaid back taxes, though a mortgage or other security interest recorded before the IRS files its notice generally has priority over the tax lien.10Internal Revenue Service. Federal Tax Liens
Credit Report Damage
Missed payments, defaults, and collection accounts land on your credit report and make it harder to borrow, rent, or get hired for certain jobs. Federal law limits how long most negative information stays. Collection accounts, civil judgments, and paid tax liens drop off after seven years. A Chapter 7 bankruptcy stays for up to 10 years from the filing date.11Office of the Law Revision Counsel. 15 USC 1681c – Requirements Relating to Information Contained in Consumer Reports
Tax Penalties and IRS Payment Plans
Filing your federal return late triggers a penalty of 5% of the unpaid tax for each month the return is late, capped at 25%. If the return is more than 60 days late, the minimum penalty is the lesser of $525 (for returns due in 2026) or 100% of the tax owed.12Internal Revenue Service. Topic No. 653 – IRS Notices and Bills, Penalties and Interest Charges A separate failure-to-pay penalty of 0.5% per month applies to any balance left unpaid after the filing deadline, also capped at 25%. When both penalties apply in the same month, the filing penalty is reduced by the amount of the payment penalty, so the combined charge is 5% per month rather than 5.5%.13Internal Revenue Service. Failure to Pay Penalty
If you can’t pay in full, the IRS offers short-term payment plans of up to 180 days with no setup fee, and long-term installment agreements with setup fees ranging from $22 to $178 depending on how you apply and how you pay.14Internal Revenue Service. Payment Plans – Installment Agreements An approved installment agreement cuts the failure-to-pay penalty from 0.5% to 0.25% per month.13Internal Revenue Service. Failure to Pay Penalty
Your Protections Against Collectors
When an unpaid obligation is sent to a third-party collection agency, federal law limits what the collector can do. Under the Fair Debt Collection Practices Act, collectors cannot threaten violence, call repeatedly to harass you, misrepresent who they are or how much you owe, or contact third parties like your employer or family about the debt (with narrow exceptions for locating you). If you have an attorney, the collector must go through your attorney rather than contact you directly.15Federal Trade Commission. Fair Debt Collection Practices Act Text
Creditors also face time limits on collection lawsuits. Every state sets a statute of limitations by debt type, generally between three and fifteen years for written contracts, after which a creditor can no longer sue to collect. Making a partial payment or acknowledging the debt in writing can restart the clock in many states, so it’s worth checking where the deadline stands before taking any action on an old debt.
What Bankruptcy Can and Cannot Erase
Bankruptcy can wipe out many financial obligations, but several categories are specifically excluded. Filing Chapter 7 (liquidation) or Chapter 13 (repayment plan) will not discharge:
- Domestic support obligations. Child support and alimony survive bankruptcy in all cases.16Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge
- Most tax debts. Recent income taxes, taxes where no return was filed, and taxes involving fraud cannot be discharged.16Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge
- Student loans. Federal and qualified private student loans remain unless you can prove undue hardship, a standard courts interpret strictly.16Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge
- Debts from fraud. Any obligation arising from fraud, false representations, or embezzlement survives.16Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge
- Injury from intoxicated driving. If you caused death or personal injury while driving under the influence of alcohol or drugs, that debt is non-dischargeable.16Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge
- Government fines and penalties. Criminal fines, penalties payable to a government agency, and restitution orders generally cannot be wiped out.16Office of the Law Revision Counsel. 11 U.S. Code 523 – Exceptions to Discharge
Everything else on your books—credit card balances, medical bills, most older unsecured debts—may be dischargeable, but the specifics depend on which chapter you file and your income relative to your state’s median.