setoff
Definition
A setoff is a legal right that lets you reduce the amount you owe someone by subtracting a debt they owe you in return. For example, if two businesses owe each other money, they can cancel out those debts instead of both writing separate checks. Courts and creditors recognize this as a fair way to settle mutual debts without unnecessary back-and-forth payments.
Example
Your supplier owes you $2,000 for a return, but you also owe them $5,000 for a recent order, so instead of exchanging two payments, you simply pay them $3,000 to settle both debts at once.
Watch Out
If your business goes bankrupt, a creditor may try to use setoff to grab money you were expecting to receive, which could leave you with less cash than you planned on having.
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This definition is for informational purposes only and does not constitute legal advice. Please consult with a licensed attorney for legal guidance.