Bankruptcy Law Matters

Setoff is an equitable right of a creditor to deduct a debt it owes to the debtor from a claim it has against the debtor arising out of a separate transaction. For instance, if the debtor owes a prepetition debt to a particular creditor, and that creditor also owes a prepetition debt to the debtor, the creditor can setoff the debt which is owed to the debtor. The Bankruptcy Code is not an independent source of law that authorizes a setoff; it recognizes and preserves rights that exist under non-bankruptcy law. Therefore, a creditor seeking to setoff a debt must establish a claim and a right to do so under state or federal law. A setoff can be an affirmative defenses or a counterclaim. Setoffs in bankruptcy are only available when both the opposing claims arise on the same side of the timeline according to the filing of the petition. The claims must both be either prepetition claims or postpetition claims.

Setoff is only available when the obligations between debtor and creditor are mutual. Both obligations must be held by the same parties in the same right or capacity, and both must arise either prepetition or postpetition. Where the parties are identical, but they stand in different relationships in various transactions, mutuality does not exist.

For setoff to be permitted, both debts must arise prepetition or postpetition. 

Thus, a claim which arises prepetition may be setoff only against a credit which also arises prepetition. Claims “arise” for bankruptcy purposes when (1) all “transactions” or acts necessary for liability occur, and for government claims, (2) there is some prepetition relationship, such as contact, exposure, impact, or privity between the United States and the debtor such that the Government is able to fairly contemplate that it might have a claim against the debtor.

Bankruptcy courts lack a statutory predicate to disallow setoff for “equitable” reasons. Generally, courts have only disallowed otherwise valid setoffs in two categories of cases:

Setoffs made within 90 days of the debtor filing for bankruptcy relief may be recovered by the trustee. The trustee applies recovered property to pay the debts owed 

unsecured creditors

If you have any questions about setoffs in bankruptcy, we encourage you to get in contact with us right away, especially if you reside in or near the Atlanta Georgia area. Broadnax & Martin specialize in all aspects of bankruptcy law, including setoffs in bankruptcy. We can help clarify the process, answer your questions and guide you through the necessary steps along the way. Contact us now.

The debtor is required to attend the meeting and to submit to examination under oath. The purpose of the meeting is to give creditors and the trustee an opportunity to examine the debtor regarding the debtor’s acts and property, and to address any other matter that may affect the debtor’s right to a discharge or the administration of the bankruptcy estate. An individual Chapter 7 debtor shall not retain possession of personal property in which a creditor has a purchase-money security interest unless the debtor, within 45 days after the first meeting of creditors under section 341(a), either enters into a reaffirmation agreement on the creditor’s claim or redeems the property. If the debtor fails to so act, the automatic stay with respect to such property is terminated, the property is no longer property of the estate, and the creditor can take whatever action with respect to the property is permitted by applicable non-bankruptcy law. However, the court, on motion of the trustee, may find that the property is of consequential value or benefit to the estate and order delivery of the property to the trustee.

An important purpose of the Section 341 meeting in a Chapter 7 case is the election of a creditors’ committee. A creditors’ committee may consult with the trustee or the United States Trustee in connection with the administration of the estate, make recommendations to the trustee or United States Trustee respecting the performance of the trustee’s duties, and submit questions to the court or the United States Trustee concerning the administration of the estate. Only creditors with undisputed general unsecured claims can join Chapter 7 creditors’ committees.

In Chapter 11 cases, creditors’ committees play a prominent role in many cases and the members are selected by the United States Trustee. The committee functions as the representative of creditors who hold allowable, unsecured, nonpriority claims. Governmental entities are generally excluded from participation on Chapter 11 creditors’ committees.

About case closing and reopening: After an estate is fully administered and the court has discharged the trustee, the court shall close the case. The Rules of Bankruptcy Procedure provide the procedure for case closing. If in a Chapter 7, Chapter 12 or Chapter 13 case the trustee has filed a final report and final account and has certified that the estate has been fully administered, and if within 30 days no objection has been filed by the United States Trustee or a party in interest, there is a presumption that the estate has been fully administered. The final report and account of the trustee is required to be filed with the court and the United States Trustee.

A case may be reopened in the court in which the case was closed to administer assets, to accord relief to the debtor, or for other cause. Though the court may permit reopening of a case so that the trustee may exercise an avoiding power, laches may constitute a bar to an action that has been delayed too long. A case may be reopened on motion of the debtor or other party in interest under the Bankruptcy Code. In a Chapter 7, 12, or 13 case a trustee shall not be appointed by the United States Trustee unless the court determines that a trustee is necessary to protect the interests of creditors and the debtor or to insure efficient administration of the case. The Federal Rules of Civil Procedure exempt motions to reopen cases under the Code from the one-year limitation. Although a case has been closed the court may sometimes act without reopening the case, such as when there are clerical errors in judgments, orders, or other parts of the record or errors therein caused by oversight or omission may be corrected. A judgment determined to be non-dischargeable may be enforced after a case is closed by a writ of execution. In order to avoid unnecessary cost and delay, a case may be reopened without the appointment of a trustee when the services of a trustee are not needed. The United States Trustee has the duty to appoint trustees in Chapter 7, 12 and 13 cases. In most reopened cases, a trustee is not needed because there are no assets to be administered. A motion is not necessary unless the United States Trustee or a party in interest seeks the appointment of a trustee in the reopened case.