Preserving a Creditor’s Setoff Rights

Jason Rosenthal, Esq. contributed to this article.

Imagine a debtor and creditor who have had numerous transactions between each other under various agreements. Under one agreement, the debtor may owe the creditor money and, on another agreement, the creditor may owe the debtor money. Outside of bankruptcy, the debits and credits under the agreements can typically be resolved through setoffs. Once a debtor files a bankruptcy case, Section 553 of the Bankruptcy Code preserves the creditor’s right of setoff. This is a very important right of the creditor considering the fact that it is highly unlikely that the creditor will fully recover its unsecured claim in a bankruptcy case. As explained below, the creditor must be careful not to inadvertently waive its setoff rights in its proof of claim.