How do life debts work?

It's my heartfelt opinion that Severus didn't owe James Potter a damned thing but a punch in the gut, because the alleged "life debt" was incurred under questionable circumstances (and this is one of the exceedingly rare times where I really don't give a damn what Dumbledore said).

And Severus wasn't protecting Harry for James, he was protecting him for Lily, so I don't think that counts. :p

Interesting question. I often use life debts in my fanfics - I'm also fascinated by the topic.

Children owe the ultimate life debt to their parents anyway, as their parents gave them life.

As for other people, it's just when one person saves the life of another, there's a life debt incurred.

Severus owed James a life debt because James saved him from Remus was under his werewolf form, after Sirius had lured Severus to the Shrieking Shack.

Peter owed one to Harry because he was about to be killed by Sirius and Remus in the Shrieking Shack and Harry said no. (I've just watched the PoA again a few moments ago.) In the book, Harry invokes that life debt Peter owes him, when they are jailed in Malfoy Manor. Shame they did not put that bit into the movie (and finishes Peter off at the same time with his magical hand given by Voldemort).

As for Harry not owing a life debt to Severus... I'm not so sure. I think the boy did owe a serious life debt to the Potions Master - and even several, if we may say. However, we may argue that in fact, as Severus was James' debtor, he repaid his debt by protecting the son, which would nullify any debt incurred by Harry with Severus.

Don't know if I've been clear in my explanations but that's how I understand the whole thing.