Live Chat
During This Challenging Time

We are open for business and remain dedicated to your case! All those working on-site and remotely are still available to answer your questions. The well-being of our clients and staff are vital, so we will provide updates as the situation progresses.

During This Challenging Time Close

Setoff in Bankruptcy

August 6, 2013

One area of bankruptcy law that can be a surprise to some debtors, especially pro se debtors, is the concept of “setoff”. Section 553 of the Bankruptcy Code allows creditors to offset debts owed to the creditor with debts that the creditor owes back to the debtor. The most common example of this would be a debtor’s bank account at an institution where they carry credit card debt. For example, Joe banks at Federal Bank where he has a checking account. That checking account has $2,500.00 in it the day Joe files bankruptcy. Prior to filing, Joe had a credit card with Federal Bank that he owed $5,000 on. Once Joe files bankruptcy, Federal Bank would be entitled to freeze Joe’s bank account and take his $2,500.00 to “setoff” the debt owed to them.

To enforce a setoff, the creditor has to have the right to do so under state law; Texas happens to be a state that allows setoff.  Once a debtor files bankruptcy, the creditor can administratively freeze any bank account the debtor has with them. Before the creditor can actually “take” the funds in the bank account, the creditor will have to file a Motion to Lift the Automatic Stay.

However, it is important to remember that a setoff only affects PRE-petition debts and PRE-petition credits. Here’s an example: Joe files bankruptcy on Wednesday. At the time of filing, Joe owed Federal Bank $5,000. At the time of filing, Joe did not have any money in his Federal Bank checking account. On Friday, Joe gets his paycheck direct deposited into his account for $2,000. Can Federal Bank take that money? Absolutely not. Joe filed on Wednesday and the money was not in his account until Friday, therefore Federal Bank would not be able to touch that money.

Setoff is a hidden pitfall that debtors can encounter if they don’t have an attorney. It is just one of the many instances where having an attorney can actually end up saving you a great deal of money and frustration. If you’re looking into filing bankruptcy and have questions, contact the knowledgeable attorneys at Fears Nachawati who will set you on the right path.


Use the form below to send us a note, call us at 214.890.0711 or chat with us live. We are eager to help with your legal needs. Please keep in mind that any unsolicited information sent through our website cannot be treated as confidential. Contacting us through this site does not create a representation relationship with Fears Nachawati.

Contact Us


With offices across Texas, and attorneys licensed in Texas, Florida, Arkansas, New Mexico, California, Illinois, District of Columbia, Missouri and Oklahoma, Fears Nachawati is dedicated to attaining the best possible solutions for our clients’ business and personal needs. We strive to be professionals who are creative, empathetic and reliable.

All Areas Served

We Can Help

Contact Fears Nachawati today

Free Consultation

Live Chat (Online Now)