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Offset Rights (the Right to Setoff) in Bankruptcy Setoff is the right of a creditor to offset a pre petition debt owed to the debtor against the debtor's pre petition liability to the creditor. The Bankruptcy Code makes it clear that unsecured trade creditors do not have an absolute right of offset. For example, the right to offset a debit against a credit is affected by the timing of those obligations. The right of setoff may subject to the automatic stay provisions of the US bankruptcy code. A creditor cannot offset pre-petition accounts receivable against post-petition accounts payable without approval from the bankruptcy court. This approval is unlikely to be given by the Court because doing so would violate many of the fundamental concepts of the bankruptcy code. Upon learning of a bankruptcy filing, a creditor should consult with bankruptcy counsel before attempting to setoff any debts, or trying to reclaim any merchandise. The Bankruptcy Code permits a debtor in possession or trustee to recover any amount by which a bank or other creditor improved its collateral position through setoff or other means in the 90 days preceding bankruptcy. Payments to unrelated third parties during the 90 days prior to the bankruptcy filing are potentially preferential transfers. Setoff and preferential transfers Although a setoff has a substantive effect similar to that of a preference and is commonly viewed as a type of preference permitted by statute. Once the right of setoff has been established, the Bankruptcy Code provision permitting the avoidance of preferences bestows secured status upon a creditor for the amount of its setoff, so payments to a secured creditor are not considered to be preferential since the creditor does not receive more than it would receive in a Chapter 7 liquidation. See also Preferences Edited by : Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore. |
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