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Setoff
Also called right of setoff, set-off, offset.
A creditor's right to apply money it already holds for you — usually deposits — against what you owe it, without going to court first.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Banks reserve it in the deposit account agreement: if the customer defaults on a loan or line with the same institution, the bank may take funds from accounts it holds. It is contractual and, for banks, also supported by common law in most states. It does not require a judgment, a writ or notice in advance, though the account agreement and state law govern the details and some categories of funds are protected.
The same principle appears in commercial finance. A factor holds a reserve and may set off chargebacks, disputed invoices and fees against it before releasing anything. An asset-based lender sweeping into a controlled account applies collections against the outstanding balance as they arrive. Advance agreements sometimes reserve setoff rights against any funds the funder holds for the merchant.
Practically it explains why borrowing from the bank that holds your operating account is a different exposure from borrowing elsewhere: the same institution controls both sides.
Where this one catches people
Businesses in trouble move their operating account to a new bank to get out from under a daily debit, and treat the old bank as a closed chapter. If the old bank is also the lender, deposits left behind or received later — a card settlement, a customer's mistaken payment to the old account — can be applied against the debt on arrival. Setoff needs no court order.
Where you will meet this term
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Setoff — common questions
What does setoff mean?
A creditor's right to apply money it already holds for you — usually deposits — against what you owe it, without going to court first.
Where does setoff catch people out?
Businesses in trouble move their operating account to a new bank to get out from under a daily debit, and treat the old bank as a closed chapter. If the old bank is also the lender, deposits left behind or received later — a card settlement, a customer's mistaken payment to the old account — can be applied against the debt on arrival. Setoff needs no court order.
Is setoff the same as an interest rate?
Setoff is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does setoff apply to?
Term Loan, Business Line of Credit, Invoice Financing, Asset-Based Lending.
Is there a worked example of setoff?
Not on this entry. Where a term is arithmetic, the arithmetic is shown; this one is not primarily a calculation.
What else should I read alongside setoff?
Reserve, Sweep, Writ of execution.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.