Setoff

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This practice note discusses the use of setoff by creditors as a mechanism to limit loss when a debtor has filed bankruptcy. In bankruptcy, setoff is governed by and subject to the limitations imposed by Section 553 of the Bankruptcy Code.

Section 553 of the Bankruptcy Code recognizes a creditor’s right to offset a pre-petition obligation it owes to the debtor against a pre-petition obligation the debtor owes to it. This setoff right, which permits the parties to cancel mutual debts, effectively shields a creditor from being obligated to pay its debt in full to a debtor and then needing to stand in line to collect only a pro-rata share of the debt owed by the debtor to that creditor. Thus, a creditor with a right to setoff receives priority over other creditors (after obtaining relief from the stay to exercise the setoff right).

Originally published on October 12, 2022, as a LexisNexis Practical Guidance® Practice Note.

Please see full publication below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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