Setoff Rights Clause
(Identifying and Managing Bankruptcy Risk)

Summary

This setoff rights clause is for use in a contract to manage the risk that setoff won't be permitted in bankruptcy. This template includes practical guidance and drafting notes. Section 553 of the Bankruptcy Code recognizes a creditor's right to offset a pre-petition obligation it owes to the debtor against a pre-petition obligation the debtor owes to it. This setoff right, which permits the parties to cancel mutual debts, effectively shields a creditor from being obligated to pay its debt in full to a debtor and then needing to stand in line to collect only a pro rata share of the debt owed by the debtor to that creditor. Thus, a creditor with a right to setoff receives priority over other creditors (after obtaining relief from the stay to exercise the setoff right). For more information, see Setoff.