Right of Setoff(Banking) Law and Legal Definition

In order to cover a loan in default, a bank has a legal right to seize funds of a guarantor or the debtor. A settlement of mutual debt between a creditor and a debtor through offsetting transaction claims is also known as setoff. Through this settlement, a creditor can collect a greater amount than they usually could under bankruptcy proceedings. When a setoff clause is entered into, the bank can seize the customer's current deposit. A bank exercising a right of setoff must fulfill the following conditions :

1. the account from which the firm transfers funds must be held by the customer owing the firm money;

2. the account from which the firm transfers the money and the account from which the money would otherwise have come, must be held with the same firm;

3. both account must both be held in the same capacity by the customer; and

4. the debt must be due and payable.