Legal Definitions - confusion of debts

Confusion of Debts refers to a legal principle where a debt is extinguished because the same person or entity becomes both the debtor (the one who owes the money) and the creditor (the one to whom the money is owed) for that specific debt. Essentially, you cannot owe money to yourself, so when this situation arises, the obligation to pay is legally dissolved.

Here are some examples illustrating this concept:

• Example 1: Inheritance

  Imagine a son, David, borrowed $20,000 from his mother, Eleanor, to start a business. They had a formal loan agreement in place. Years later, Eleanor passes away, and in her will, she names David as the sole heir to her entire estate, which includes the right to collect the $20,000 debt from David. In this scenario, David, as the heir, now legally owns the right to collect the debt from himself. Because he is both the debtor and the creditor for the same $20,000, the debt is extinguished by confusion of debts.

• Example 2: Corporate Acquisition

  Consider Company A, which has a $5 million loan outstanding from Company B. Later, Company A decides to acquire Company B, making Company B a wholly-owned subsidiary. Once the acquisition is complete, Company A effectively owns Company B, and therefore, Company A now holds the right to collect the $5 million debt from itself (through its subsidiary). Since the same economic entity is both the debtor and the creditor, the $5 million debt is extinguished through confusion of debts within the consolidated corporate structure.

• Example 3: Assignment of Debt

  Suppose Maria owes her friend, Liam, $3,000 based on a signed promissory note. Liam, in a gesture of goodwill or as part of a separate settlement, decides to formally assign all his rights to collect that $3,000 debt directly to Maria. By accepting this assignment, Maria now possesses the legal right to collect the $3,000 from herself. As she is simultaneously the debtor and the creditor for the same $3,000, the debt is extinguished by confusion of debts.