If you owe me and I owe you: when debts cancel themselves out

It is Section Four of Chapter II of Title II of Book Four of the Civil Code of 2020, Articles 1144 to 1152. It is the way debts are extinguished without anyone paying: where two persons owe each other, the debts cancel out as far as they coincide.

Two persons who are, in their own right, reciprocally creditor and debtor of each other, and whose debts meet the five requirements of Article 1145. Also the surety, as to what the creditor owes their principal debtor.

• That each person bound is so principally and is at the same time principal creditor of the other.Verified against the official source
• That both debts consist of a sum of money or, if the things owed are fungible, of the same species and quality where this has been designated.Verified against the official source
• That both debts are liquidated, due and enforceable.Verified against the official source
• That over neither of them is there a suspension of payment or a dispute brought by third parties and timely notified to the debtor.Verified against the official source
• That there be no legal prohibition.Verified against the official source

• Evidence of the two debts and of their liquidity and maturity, because without it subsection (c) of Article 1145 is not met.
• The clear and express agreement, where what is to be compensated are debts not of the same nature or not principal.

1. 1

   Step 1: What it is, and that it happens on its own

   Article 1144 defines it: compensation takes place when two persons are, in their own right, reciprocally creditor and debtor of each other. And it describes its effect with a surprising clause: extinguishing both debts in the concurring amount, even if neither creditor nor debtor knows of it. It need not be invoked to operate.

2. 2

   Step 2: The five requirements

   Article 1145 lists them and all must be met. That each person bound is so principally and is at the same time principal creditor of the other. That both debts consist of a sum of money or, if the things owed are fungible, of the same species and quality where this has been designated. That both debts are liquidated, due and enforceable. That over neither is there a suspension of payment or a dispute brought by third parties and timely notified to the debtor. And that there be no legal prohibition.

3. 3

   Step 3: The surety’s exception

   Article 1146 expressly breaks the first requirement: notwithstanding subsection (a) of the preceding article, the surety may raise compensation as to what the creditor owes their principal debtor. It is the only person the Code allows to compensate with a debt that is not their own.

4. 4

   Step 4: If the creditor assigned the credit

   Article 1147 grades the answer by what you knew. If you consented to the assignment, you cannot raise against the assignee the compensation you had against the assignor. If the creditor gives you notice and you do not consent, you may raise the compensation of debts prior to it, but not of later ones. And if the assignment was made without your knowledge, you may raise that of credits prior to it and of later ones until you learned of the assignment. Consenting is what costs you most.

5. 5

   Step 5: Debts payable in different places

   Article 1148 does not exclude them: debts payable in different places may be compensated by indemnifying the transport expenses or by changing the place of payment. Distance is settled with money; it does not block compensation.

6. 6

   Step 6: What cannot be compensated

   Article 1149 names five. Debts of support given gratuitously. Credits against which there are objections. Attached credits, if the debtor acquired their credit after the attachment, or if their credit fell due after the attachment and after the maturity of the attached credit. Non-attachable credits. And credits of the Commonwealth or a municipality, unless the performance is owed to the same fund from which the credit of whoever compensates must be paid.

7. 7

   Step 7: If several debts may be compensated

   Article 1150 invents no new order: if several debts may be compensated, the order provided for the application of payments is followed. That is, the same rules as Articles 1126 to 1128, with interest ahead of principal.

8. 8

   Step 8: The one agreed and the one the judge decides

   Two more articles widen the figure. Article 1151: reciprocal creditors and debtors may agree, clearly and expressly, the compensation of debts that are not of the same nature or that are not principal; there the requirements of 1145 yield to the agreement. And Article 1152: judicial compensation operates when the judge, in a counterclaim, liquidates the credit corresponding to the plaintiff.

Legal compensation operates on its own between the two parties, with no counter and no procedure. The conventional one is agreed between them. The judicial one is declared by the judge in a counterclaim case, before the Court of First Instance. The Code names no agency here.

• Compensating debts not yet due or not liquidated: subsection (c) requires liquidated, due and enforceable.
• Compensating a money debt against a delivery of things not of the same designated species and quality.
• Compensating where there is a dispute brought by third parties timely notified to the debtor.
• Consenting to the assignment of the credit and then trying to raise compensation against the assignee.
• Dismissing compensation because the debts are payable in different places: it is settled with transport expenses or by changing the place of payment.
• Compensating an attached credit in the cases Article 1149 excludes.
• Compensating against the Commonwealth or a municipality outside the same-fund case.
• Agreeing to compensate different debts without making it clear and express, as Article 1151 requires.

These are the government pages this guide is based on.

• Poder Judicial de Puerto Rico

  Poder Judicial

  bvirtualogp.pr.gov