Right of Offset

Definition: The contractual or legal right of a financial institution or creditor to seize funds from a debtor’s account held with the same institution to satisfy an outstanding debt owed by the debtor.

Examples: A bank may exercise its right of offset to withdraw funds from a business’s operating account to cover past-due loan payments.

A commercial bank exercised its right of offset after a business client missed several consecutive loan payments. By drawing funds directly from the company’s deposit account, the bank was able to reduce the outstanding balance without initiating external collection actions.

During restructuring negotiations, a lender warned that it might use setoff rights if the borrower did not provide updated financials. This prompted the business to cooperate, knowing that the bank could legally apply available cash toward the delinquent loan.

For creditors, the right of offset is an important risk-management tool. It minimizes potential losses by allowing funds already under the creditor’s control to be redirected toward an unpaid obligation before the borrower relocates or withdraws assets.

The use of setoff allowed the creditor to recover part of the debt immediately, improving overall recovery outcomes while reducing the need for costly litigation. For the business, this action underscored the urgency of establishing a repayment plan to avoid future disruptions to cash flow.