Browse terms
Secured debts and liens
Setoff
Setoff, or the right of setoff, is a creditor's right to cancel a debt it owes the debtor against a debt the debtor owes it from a separate transaction. In bankruptcy, that right generally survives when both debts arose before the case began, subject to exceptions. 1 2
Talk to a lawyerHow does the right of setoff work in bankruptcy?
The debts must be mutual: owed between the same parties, in the same capacity, and both arising before the petition or both after it. Bankruptcy does not create the right; the creditor must have it under state or federal law. 1
Filing changes the timing. While the automatic stay is in effect, it bars the setoff of a pre-bankruptcy debt owed to the debtor against a claim against the debtor. A creditor that wants to act during the case has to ask the court for relief from the stay. 2 3
The creditor's position is still recognized. A claim that is subject to setoff is treated as a secured claim up to the amount subject to setoff. 2
A setoff taken shortly before filing can be reviewed. If a creditor offsets a mutual debt on or within 90 days before the petition, the trustee may recover the amount offset to the extent the creditor's shortfall was smaller on the date of the setoff than at the start of that period. 2
What is the difference between setoff and recoupment?
| Topic | Setoff | Recoupment |
|---|---|---|
| Where the two debts come from 1 | Separate transactions 1 | The same transaction 1 |
| Where the right comes from 1 | State or federal law outside bankruptcy 1 | The same: bankruptcy preserves it but does not create it 1 |
General rules only. Whether a creditor can use either right depends on the facts and the law that applies.
Common questions
Can a creditor use setoff after I file?
Can a setoff from before the filing be undone?
Sometimes. The trustee may recover a setoff taken on or within 90 days before the petition, to the extent the creditor's shortfall shrank during that period. 2
A lender I owe also owes me money. Can it just keep that money?
Sources
Owe money to a creditor that also holds your funds?
A bankruptcy lawyer in your state can explain how setoff could affect you before you file.
Connect to a bankruptcy lawyer