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Set-Off Rights Can Protect Some Creditors

creditor.jpgBusiness bankruptcy cases are challenging for all parties involved, including the creditors. This especially true for businesses that became a creditor without ever actually lending money. For instance, when a company enters bankruptcy, it often has active accounts payable or accounts receivable with other companies. This leads to some businesses becoming creditors in bankruptcy without ever engaging in the traditional lending business. It can also create a situation where a company both owes money and is owed money, by a company in bankruptcy. This creates a very confusing legal situation. Fortunately, a concept known as 'set-off rights' found under Section 553 of the Bankruptcy Code can help to clarify the situation.

Set-Off Rights Can Allow for Relief from an Automatic Stay

After a company files for bankruptcy, it is typically granted an automatic stay. Essentially, the stay temporarily halts creditors from taking any debt collection actions against the filing company. Of course, if your company owes, and is owed, money by that company, you have become a creditor. As such, your company is also bound by the automatic stay. However, using set-off rights, your company can seek relief from the automatic stay. Though, this relief is not granted automatically; it will need to be sought from a bankruptcy court. This is an extremely important and powerful legal tool because it allows your creditor's claim to move ahead in the line. After all, a company in bankruptcy will almost certainly not be paying back all of the creditors in full. Therefore, it is extremely important that creditors take advantage of all legal tools that they have available to assert the preference of their claim. To best understand how this works, consider the following example:

  • Your business is owed $1000 by a company that just declared bankruptcy; and
  • Your business also owes that company $500.

Without set-off rights, your company would be required to pay that $500 now but would not be able to collect the $1000 until after the conclusion of the bankruptcy process. Of course, by that time, there may not be enough left to repay your company much, if any, of that $1000. Using set-off rights, you can simply eliminate the $500 that your company owes the filing company. This will turn your $1000 claim into a $500 claim. By doing that alone, it will dramatically increase your likelihood of recovering as much as possible.

Contact Our Office Today

Our passionate San Jose creditors' rights lawyers have represented many creditors in both bankruptcy court and during non-bankruptcy collection actions. If you have any questions about set-off rights, please contact us today to set up your free initial case evaluation. We represent creditors throughout the Bay Area, including in Fremont, Santa Cruz, Campbell, and Monterey.



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  • Santa Clara County Bar Association | 1917
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  • CWL | California Woman Lawyers
  • Bay Area Bankruptcy | Forun
  • The State Bar of California
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