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.

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