Right of setoff definition

What is the Right of Setoff?

The right of setoff is a legal right by a debtor to reduce the amount owed to a creditor by offsetting against it any amounts owed by the creditor to the debtor. For example, a bank can seize the amount in a customer’s bank account to offset the amount of an unpaid loan. It is a useful legal right when a borrower goes bankrupt, since the creditor will likely obtain more asset value by seizing assets than by gaining a lesser amount through the bankruptcy process. Therefore, set-off clauses are most frequently found in lending arrangements where the lender suspects that the borrower may not be able to continue as a going concern.

In addition, this right allows businesses to avoid situations where the party owed more money is still obligated to pay an amount due to the other party.

Related AccountingTools Courses

Bankruptcy Tax Guide

Essentials of Corporate Bankruptcy

Essentials of Collection Law