The right of a creditor to reduce a debt it owes to the debtor by the amount the debtor owes to the creditor. The Code upholds a creditor’s right to offset mutual prepetition debts (a creditor is not permitted to offset a prepetition debt against a postpetition debt), and provides the creditor with a secured claim to the extent of its setoff right. The creditor’s right of setoff spares it from paying its debt to the debtor in “real” dollars while receiving in return an unsecured claim paid, if at all, from the debased currency of distributions under the debtor’s Chapter 11 plan (which are likely to be less than 100 cents on the dollar). A creditor must usually obtain relief from the automatic stay before exercising setoff (but see Financial Markets Contracts).
Bankruptcy Code §§ 506(a), 553. See also Motion for Relief from Stay, Oversecured Creditor, Recoupment, Secured, Secured Claim, Secured Creditor, Undersecured Creditor.