What obligation to pay? The one that the finance company has formally extinguished?

A mistake though it may be, it is unconscionable for a finance company to attempt to collect a debt on a contract that is extinguished and is no longer legally enforceable by its terms. Perhaps they could argue unjust enrichment in court, but creditors and consumers alike rely on the formal representations made in these circumstances.

Mortgage satisfaction filed at the courthouse? Oh well yes, but not really paid off... Car title lien release signed and in the hands of the owner, yes, but you still owe money...

The finance company may indeed have acted in good faith, but I don't think that it's appropriate to characterize this as a simple "error" like it was some kind of incorrectly applied credit or a miscalculation of APR.

That said, though, it may be easier to pay a cheat that to fight with them.

JacFSB is right. The loan officer was wrong and it was bad advice. It is not unreasonable to have them waive the fees and back interest, but if you owe it you owe it.

"Unconscionable"?! Hardly. You said it yourself - unjust enrichment.

"Easier to pay a cheat than to fight with them"? Who's the cheat here? The timeframe between the payment error and the payoff is only one month. It could take even longer in some cases to catch a misapplied payment. The problem was compounded because the loan was paid off and collateral released before the error was found. The bank acted in good faith. The borrower does not dispute that the payment was never made. The borrower owes the money.

If the 6th payment is made, what documentation could the finance company provide to show that now, for real this time, the debt is paid?

You may want to google your state's name and the words "waiver" and "estoppel." - This will give you a starting point if the finance company continues to demand even more payments under the terminated contract.

Equitable estoppel: the principle by which a party who knows or should know the truth (here, the finance company)
is absolutely precluded from denying any material fact (whether or not the debt is truly paid in full) which, by his words or conduct (e.g., payoff quote + payment shown on statement + note marked paid), intentionally or through culpable negligence, he has induced another (here, your sister), who was excusably ignorant of the true facts and who had a right to rely upon such words or conduct, to believe and act upon them thereby, as a consequence reasonably to be anticipated, changing her position in such a way that she would suffer injury if such denial or contrary assertion (e.g., "no, wait you still owe us money") was allowed.

Quote:

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who was excusably ignorant of the true facts

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How could the sister be excusably ignorant when she was well aware (or should have been) that the payment did not come out of her checking account as requested?

How about this twist...

A bank erroneously takes the payment from another customers account. The "other customer" is less than diligent in looking over their statements and doesn't realize the bank made this error until 3 months later, at which point they notify the bank. The bank investigates and finds that the "intended customers" account has been closed for 30 days and the bank would probably end up suffering the loss. Realizing it's too late to return the item, they decide to refuse the claim and refer to the signed account agreement that clearly states the obligation to review their statement and notify the bank within 30 days if there are any discrepancies. And, from what I understand, the general legal basis for this "out" is that the lack of notification within the required timeframe ratifies the activity and it's accuracy. (Somewhat like the original posters "paid" loan documentation and the banks actions seem to ratify that the borrowers obligation was satisfied.) So, even though the ethical response would be to credit the "other customer" account and possibly take the loss, their legal actions are contractually and legally supported. And so it goes.....

I do not disagree that if the loan payment is still owed, it should be paid - ethically. But I believe the proverbial shoe HAS been on the other foot many, many times. And often, if the ethical path leads to a loss or lower income, the legal path will prevail.

I often find it ironic, and at times hypocritical, when people in the financial industry want to hold a customers actions to ethical standards only and reserve legal "outs" for theirselves. (Warning - I'm going OT here but) Especially when it comes to a topic such as overdrafts. I don't believe "because it's the ethical thing to do" has ever been the reason for offering bounce protection and then pay large items first. Unless of course, it was followed by a wink and a nudge. But, I'm sure this is not considered "unjust enrichment" either, after all, the bank has to manually handle all those extra rejects THEY caused by making this decision.

Sorry - the RANT is over...I just don't understand why the response to a question such as this usually assumes a lack of ethics on the part of the original poster and they are often addressed in a pious, condescending manner.

There was no assumption on the lack of ethics by the presenter. We were asked "would we agree?". The answer is clearly - "if you owe the money pay it". How much simpler can it get???

Randy (and others)-

I do apologize for my rant and want to clarify that I do realize there are several posters (yourself included) who almost always read and respond in an objective, non-biased manner. And, in my opinion, that is how it should be, in this forum especially. (The almost is not referring to anything specific - but because I've been in audit for so many years, I always use qualifiers ) But, there are many, who read and respond in a manner that assumes a less than honorable intent on behalf of the presenter. Granted - there are times when this is obvious and we should all be aware and alert to those. But there are also times when it's only a matter of interpretation, as in the case of this thread.

I interpreted the original posters intended question to be that of:

"Would you agree that you should not simply and blindly hand over the payment the f/c is demanding if: #1-you had evidence (both tangible and intangible) that indicated they had already received what was owed, and; #2-they refused to provide documentation to support their claim and prove that the payoff did not take the payment reversal into account, especially in light of the timeframe involved.

And to that my reply would be: Yes, I agree you do have contradicting information and I would request in writing that they provide you with the payment history, a breakdown of the payoff, documentation reflecting the date that they received notice of the return item, and an explanation as to why there was a delay in the notification to you as well as the reversal of the payment. And, I agree with previous suggestions, that if you are satisfied the payment was not taken care of through means other than direct debit and is still owed, you should not be obligated to pay any interest that could have been avoided had you been aware the payment was reversed, and, your credit report should be corrected.

But, most responses seemed to indicate a different interpretation of the presenters intended question. That being:

"Even if you know that a payment is still owed, would you agree that it's the f/c's tough luck if you had strong tangible and intangible evidence that supports the particular payment being made as well as evidence that the entire debt has been satisfied, and they had plenty of opportunity to collect it before they stamped the note paid"

You are correct, no one specifically stated that the poster was lacking ethics. But, there was a strong incenuation that there really should be no question at all - if they say you owe the money - the ONLY ethical thing to do is trust that although they obviously do not have an efficient, effective system for ensuring return items are charged back in a timely manner, all other control procedures would effectively ensure there was no way the charge back was reflected in the payoff and their records are obviously now accurate and reflect that you still owe the money - so pay them.