In a debt cycle where A owes B, B owes C, and C owes A, what mode of extinguishing obligation applies?

In a debt cycle where A owes B, B owes C, and C owes A, what mode of extinguishing obligation applies?

• A. Confusion
• B. Compensation
• C. Merger
• D. None of the above

Answer: (B)

Compensation (set-off) is the process by which debts cancel each other out when there are reciprocal obligations among the parties. In a circular debt where A owes B, B owes C, and C owes A, each person is simultaneously a debtor and a creditor in the loop. Because these claims exist within the same network, they can be netted against one another, extinguishing the obligations across the cycle. If the debts are due and payable and the amounts align, the net result is that none of the parties owes anything after compensation. This fits the scenario, whereas confusion would require a single person to be both debtor and creditor of the same obligation, which isn’t the case here, and merger isn’t about offsetting inter-party debts in a cycle.

Compensation (set-off) is the process by which debts cancel each other out when there are reciprocal obligations among the parties. In a circular debt where A owes B, B owes C, and C owes A, each person is simultaneously a debtor and a creditor in the loop. Because these claims exist within the same network, they can be netted against one another, extinguishing the obligations across the cycle. If the debts are due and payable and the amounts align, the net result is that none of the parties owes anything after compensation. This fits the scenario, whereas confusion would require a single person to be both debtor and creditor of the same obligation, which isn’t the case here, and merger isn’t about offsetting inter-party debts in a cycle.