Definition
A liability is a legally enforceable debt that a consumer is obligated to repay.
Analysis
The use of credit creates a liability. A consumer’s history of meeting their liabilities is recorded on their credit report.
A budget measures a consumer’s financial health by evaluating the ratio of liabilities to income. A budget will show a deficit if the monthly liabilities (minimum payments) exceed the available income.
Additionally, a consumer’s net worth evaluates total liabilities in comparison to total assets. If the sum of a consumer’s liabilities exceed their assets, then they have a negative net worth. A person is deemed insolvent if they are unable to repay their liabilities.
