A defense to a claim allowing the defendant to reduce the amount it must pay to the plaintiff by the amount that the plaintiff owes to the defendant in connection with the contract or transaction on which the plaintiff seeks recovery.

The right of recoupment is similar to the right of setoff but with three important distinctions. First, recoupment is available to a creditor seeking to offset prepetition debts against postpetition debts. By contrast, setoff is not available to a creditor under such circumstances because it applies only to an attempted setoff of prepetition debts against prepetition debts (or postpetition debts against postpetition debts). Second, recoupment is available to the creditor only if the mutual obligations arise from the same contract or transaction, a limitation not applicable to a creditor’s right of setoff. Third, a creditor may exercise recoupment without seeking the bankruptcy court’s permission, while the creditor cannot exercise its right of setoff without first obtaining relief from the automatic stay.

Bankruptcy Code § 553. See also Automatic Stay, Setoff.

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