You recently contracted a debt, and you wonder how you will have to reimburse it.
Although the most obvious solution is simply to respect your contractual obligations and to pay the debt in its entirety, there are different alternatives that can be interesting for you.
Indeed, in some situations, where specific conditions are met, it is possible to notice the extinction of obligations. Other than the payment, the Civil Code also provides alternatives such as confusion, release, impossibility of performance, or discharge of the debtor.
Another solution is debt compensation. Indeed, whenever you file the compensation conditions, you will be able to ask for the extinction of your debt. However, there are some strict conditions to respect.
Furthermore, when you make the decision to seek compensation for a debt, it is also important to understand the consequences for you. In other words, it does not simply make your debt disappear in its entirety.
With the help of JuriGo, see how debt compensation works and if it is the right solution for you!
What Is the Debt Compensation?
When a debt is due, it can be difficult for the creditor to recover his money, no matter if the debt comes from a loan or any other type of contract. This is particularly the case when the debtor is in payment default or one of the situations below:
- Assignment of debt,
- Bankruptcy, or
- A legal procedure is necessary to obtain the payment.
It is exactly in situations where debt recovery is complicated that debt compensation can come in handy. Indeed such an alternative is established in Article 1672 of Quebec’s Civil Code:
| Article 1672. Where two persons are reciprocally debtor and creditor of each other, the debts for which they are liable are extinguished by compensation, up to the amount of the lesser debt.Compensation may not be claimed from the State, but the State may claim it. |
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In other words, debt compensation is a way to extinguish 2 reciprocal debts between the same persons. Of course, this does not grant the right for one of the debtors to gain an unfair advantage. Therefore, the compensation only works up to the value of the lowest debt.
Such compensation will be exercised by right when the two individuals in question are both debtor and creditor to each other and that two debts are both certain, liquid and payable. Furthermore, for the compensation to work the debt most concern money for a certain quantity of fungible goods from the same category.
Although compensation can be exercised through the disposition within the Quebec Civil Code, two other options exist. Indeed, judicial compensation which is ordered by a judge and contractual compensation which is within a contract are alternative options.
Who wishes to know how debt compensation works and if it applies to you? Ask all your questions to one of the lawyers partnered with JuriGo!
Debt Compensation – What Are the Conditions to Exercise My Right?
As you may have noticed, to exercise your right to debt compensation, many conditions must be fulfilled. However, once you respect all of them, the compensation will operate as a payment method that will extinguish your debt.
Firstly, you must have two debts to compensate between the parties. Therefore, they need to concern themselves with similar types of obligations and be of the same nature. In most cases, it is financial debt and thus, they do not cause any trouble. Furthermore, it does not cause any problems.
Secondly, both debts must be liquid at the time of the compensation. This condition ensures that both parties are in a position to claim the money they are seeking. Indeed, the debt must be real at the time of the compensation.
How to know if a debt is liquid? Its existence must not be contested in any way. Furthermore, the exact amount of the debt must be fixed with precision or, at least, easily fixable. In other words, the debt’s existence must be obvious.
Thirdly, the debts need to be due for the compensation to proceed. Indeed, it will be impossible to exercise compensation between debts if one of them is linked with conditions that are not met yet.
However, when there is a grace period granted to the debtor, for the payment of what is due, this does not block the possibility to seek debt compensation. This is due to the fact that the debt is nonetheless due and liquid.
The objective of the grace period is simply to postpone any legal proceedings regarding debt recovery. Hence, to be considered as due, the payment of the debt may be required by the creditor at any point.
What Happens if the Debtor Is Bankrupt?
According to the rules within the Bankruptcy and Insolvency Act, the bankrupt is not able to make a valid payment by himself to one of his creditors. Thus, it is necessary to know if compensation is possible between the debt of the bankrupt and the debt of the creditor. Such a scenario is specifically mentioned in Article 97(3) of the Act:
| Article 97(3). The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provision of this Act respecting frauds or fraudulent preferences. |
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Therefore, if the situation allowing debt compensation existed before the bankruptcy and if all the conditions are met at the right time, it will be possible to oppose your right to debt compensation to the trustee as long as you respect the general obligation of good faith.
Additionally, if one of the debts is payable at term, the Civil Code provides that the insolvency of the debt will ultimately cause a lapse of term. Hence, the debt will most probably be due at the moment of the bankruptcy. You will then be able to seek debt compensation.
However, there is still the more complex question of how to determine what can occur subsequently to the date of the bankruptcy when the debt does not become liquid nor due before the bankruptcy.
According to different case decisions, the regulations’ objective is to allow, after the bankruptcy, the legal compensation between two existing debts at the time that the debtor declared bankruptcy. The only limit to the debt compensation seems to concern fraud and fraudulent preferences.
Debts Transfer or Mortgage: What Is the Impact on Compensation?
Regarding the relationship between debt compensation and debt transfer (or mortgage), Article 1680 of the Quebec Civil Code establishes the full extent of the impact.
| Article 1680. A debtor who has acquiesced unconditionally in the assignment or hypothecating of claims by his creditor to a third person may not afterwards set up against the third person any compensation that he could have set up against the original creditor before he acquiesced.An assignment or hypothesis in which a debtor has not acquiesced, but which from a certain time may be set up against him, prevents compensation only for debts of the original creditor which arise after that time. |
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Therefore, it will not be possible for the debtor to seek compensation from the person who obtains the debt through its transfer. The same goes the other way around. Indeed, having transferred the debt, the creditor will not be able to seek compensation.
However, if the debtor does not acquiesce to the transfer of the debt as mentioned within the Civil Code, he will be able to seek compensation even if a third party is now involved in the procedures.
If you Want to Use Debt Compensation, JuriGo can Help you Find the Lawyer you Need!
As you may have noticed, debt compensation is a great tool whenever you wish to extinguish a debt you owe to someone who simply does not want to respect their obligations to you and fail to pay their own debt.
However, to be able to use debt compensation, a lot of conditions must be respected. Furthermore, depending on the situation you find yourself in, it can be even more difficult to apply this method of “debt payment”.
This is particularly the case when the amount of money is particularly high and when you currently need it. A sense of stress can then take over and it can be difficult to find a solution that suits your needs.
However, with the help of a lawyer specialising in contracts, you will have all the tools you need to find the right solution for you. If compensation is not the right remedy, the lawyer will be able to offer you numerous alternatives.
To find the right lawyer, all you need to do is fill up JuriGo’s form and we will take care of the rest for you!