Recoupment Or Setoff? - A Distinction With A Difference

Setoff is commonly encountered in bankruptcy and non-bankruptcy situations.  If there are mutual debts between two entities, either may generally offset the debts.  These debts frequently arise where one entity is a vendor to a customer and selling on credit, and at the same time is also making occasional purchases on credit from the customer.  If one entity owes $100 to a second entity but is owed $300 by this second entity, these mutual debts may be offset, leaving just the $200 owed by the second entity.

Recoupment is a subset of setoffs.  It has been defined as "the setting up of a demand arising from the same transaction as the plaintiff's claim or cause of action, strictly for the purpose of abatement or reduction of such claim."¹  In addition to mutuality, an element necessary for recoupment is that the two sets of claims must have been part of a single integrated business transaction between the two entities.