Debt Extinguishment: Compensation, Confusion, Remission, and More
Compensation
Compensation is the extinguishment of obligations that occurs when two people are both debtors and creditors to each other in their own right.
Effects of Compensation
- Extinguishes two debts by operation of law to the amount of the lesser debt (partial compensation).
- If both debts are equal, it completely extinguishes the legal bond and the obligation (total compensation).
- Extinguishes accessory obligations in the same proportion, including ancillary debt, interest expenses, and personal guarantees.
Elements of Compensation
- Two persons
- Mutual quality of debtors and creditors
- Debtors and creditors act in their own right
Types of Compensation
Legal Compensation
- Both debts are in money, or if they are expendable, they are of the same kind and quality, provided they are designated in the contract from which they emanate.
- Both debts are liquid, i.e., the amount is determined or determinable within nine days.
- Both debts are due, meaning lawful payment cannot be refused.
Conventional Compensation
Section 2188 provides for the possibility that, by express agreement of the parties concerned, two obligations that are not liquid or enforceable can be compensated. This is known as conventional compensation.
Judicial Compensation
This occurs when, in the course of legal proceedings, a liquid or enforceable obligation is required that was not so before the trial started.
Optional Compensation
Unlike conventional compensation, optional compensation does not rely on the mutual agreement of the parties. Instead, it involves a statement from a creditor agreeing that their credit is offset by a debt owed to the other party, if the other party agrees and accepts the offer to compensate.
Principles of Compensation
Disclaimer
Compensation may be waived, either expressly or through actions that clearly demonstrate a willingness to waive it.
Benefits or Harms Only the Parties
Compensation only operates between debtors and creditors who are acting in their own right. A debtor cannot raise compensation on the grounds that the creditor owes their guarantor, nor can a joint debtor demand compensation for a creditor’s debt to their co-debtors.
Transfer of Credit Offset Requires Consent
If a creditor disposes of its right to a third party, the debtor’s consent is required. The debtor cannot oppose compensation to the third-party assignee if they had grounds for compensation against the assignor. If the debtor opposes the transfer, the third party will have received the credit assignment subject to the debtor’s right to raise compensation in the same way they could against the transferor.
When Compensation Does Not Apply
Compensation does not occur in the following cases:
- A party has decided not to pursue it.
- If a debt originates from a sentence due to dispossession.
- If one of the debts is for food.
- If a debt is rooted in an annuity.
- If a debt is from the minimum wage.
- If the debt is related to a thing put on deposit.
- If they are tax debts, except when authorized by law.
Confusion
Confusion is the merging of the qualities of creditor and debtor in the same person as a result of a particular circumstance.
The Cause of Confusion
The cause is always legal succession, meaning the transfer of a right or debt from the creditor or debtor, respectively, to another person. This includes assignment or transfer inter vivos, which must always be under a unique title, and transmission upon death, either under a universal inheritance title or a single title or legacy.
Effect of Confusion
Confusion frees the debtor by extinguishing their liability, as a person cannot pursue themselves to fulfill an obligation.
Classes of Confusion
Total confusion occurs when the entire creditor merges with the debtor, or vice versa, extinguishing the entire debt or credit. The same applies if a third party merges with both the creditor and the debtor. Partial confusion occurs if the creditor merges with the debtor, or vice versa, for only a portion of the debt or credit, or if a third party merges with the creditor and the debtor for only part of the credit and debt.
Remission of Debt
Remission of debt is a form of waiver. It is the legal act by which the creditor voluntarily and unilaterally resigns the right to require all or part of their debtor’s payment of the benefit due.
Discharge is the means par excellence, as it involves a unilateral or bilateral legal act by which the creditor releases the debtor from their obligation.
It is also called “debt forgiveness,” and when it is partial, it is referred to as a “reduction.”
Effects of Remission
The main effect is to extinguish the right to credit, in whole or in part, as determined by the creditor.
It also has a side effect: if the debt is secured by property rights such as a mortgage or pledge, these accessories also become extinct. However, the reverse is not true; if the creditor remits the guarantees, the primary credit remains.
Forms of Remission
a) The creditor expressly declares their intention to resign orally, in writing, or by unmistakable signs. The law does not require any formalities for express reference, even if the original debt instrument was recorded in public.
b) The creditor tacitly and voluntarily surrenders the original document evidencing the debt to the debtor. This is a typical and frequent way to release the debtor, and it must be carefully considered.
Differences Between Waiver and Remission
1. Waiver is the genus and can be done for real property, personal property, or other purposes. The term “abandonment” is often used for the waiver of real rights. Remission is a species of waiver and is specifically performed for personal or credit rights.
2. Waiver can be made for a specific or indeterminate person and does not necessarily benefit anyone in particular. Remission can only be done for the benefit of the debtor.
Legal Nature of Remission
Remission is a unilateral act. It does not require the will of the debtor. The creditor can forgive the debt without the debtor’s consent.
Waiver
Waiver is a unilateral legal act of resignation or abandonment.
Elements of Waiver
a) Capacity to Give: Whenever conduct involves the voluntary loss of a right of monetary value, whether real, personal, or otherwise, it is an act of ownership or disposal. Therefore, it can only be done by a person with full capacity to enjoy and exercise their rights.
b) Waivable Rights: Not all rights under the law are subject to waiver. Capacity alone is not enough; the right must also be legally waivable.
Supervening Impossibility of Performance
Mora
Mora is the unjust delay in the breach of an enforceable obligation. The delay must be unfair, as justifiable causes like accidents, force majeure, or the creditor’s conduct may excuse the debtor from default.
Fortuitous Event
A fortuitous event is an unavoidable natural event, foreseeable or unforeseeable, that absolutely prevents the fulfillment of an obligation, e.g., tremor, storm, frost.
Force Majeure
Force majeure is an act of man, predictable or unpredictable, but inevitable, that absolutely prevents the fulfillment of an obligation, e.g., war, strike, orders of authority.
Generic and Specific Goods
Generic goods can be exchanged and maintain the same value, even if they are not exactly the same. Specific goods are determined and individualized from the beginning of the obligation and cannot be replaced by similar items.
Prescription
Prescription is a means to get rid of obligations through the course of time.
Negative prescription is the exoneration of bonds not enforced within a certain time and under conditions set by law.
Elements of Negative Prescription
- The creditor’s inactivity in enforcing the obligation.
- The passage of a specific time during which such inaction persists.
Effects of Negative Prescription
The main effect is to preclude the creditor from exercising actions to require compliance with an obligation after a certain time. It also frees the debtor from the enforcement of the obligation due to the creditor’s inactivity over time.