1. Common law right of a lender to seize deposits owned by a debtor for nonpayment of an obligation. A bank lending $5,000 to a borrower who has $2,500 on deposit at the same bank will set-off $2,500, and file an unsecured claim for the remaining $2,500. An exception is consumer credit transactions, where the right of set-off is prohibited by the Truth in Lending Act. A consumer who refuses to pay a credit card bill, claiming the merchandise ordered was defective, is thus protected from collection efforts by the card issuing bank by seizing deposits equal to the debt owed.
2. Settlement of mutual debt between a debtor in bankruptcy and a creditor, through offsetting claims. Instead of receiving cash payment, debtors credit the amount owed against the other party's obligations to them. This allows creditors to collect more than they otherwise would have collected under a debt repayment plan approved by a bankruptcy court. Also called right of setoff.
