Also known as offset.

Setoff cancels mutual financial obligations between two parties by allowing one party to reduce the amount it owes to a second party by the amount the second party owes to it. As a result, only the excess amount of the net obligations is exchanged between parties.

This term includes the following variations:

In the context of bank loans, if the bank makes a loan to a depositor, the bank can set off deposits that it holds for the depositor and apply those funds to repay the loan if the depositor defaults on its loan obligations.

In other financial contracts such as swaps and derivatives, similar to the concept of netting, setoff allows Party A to pay Party B $10 where Party A owes Party B $12 and Party B owes Party A $2, rather than going through the machinations of Party A paying Party B $12 and then Party B returning $2 to Party A.

In civil litigation, a setoff generally allows the defendant to subtract from the amount of damages that the plaintiff claims any amount that the plaintiff owes the defendant.

In the context of real estate, a self-help remedy allowing:

In the context of bankruptcy, a creditor's right under the Bankruptcy Code to apply a debt owing to it by the debtor against a debt it owes to the debtor, if the parties owe each other mutual prepetition debts arising from different transactions. Unlike recoupment, a creditor's right of setoff is subject to the automatic stay. If the creditor can obtain relief from the automatic stay, it may apply the debt owed to it by the debtor to reduce the amount it owes the debtor. The creditor may be paid in full before other creditors to the extent of its right to setoff. Common law and state statutes also grant limited rights of setoff as self-help remedies for debtors.

For more information, see the following Practice Notes: