Article Title

Setoff and Bankruptcy


The code treats liens and setoffs as secured claims. A lienor under §506 receives a secured claim in the face amount of the debt secured only if the collateral has at least that value. Section 506(a) requires collateral valuation to determine the amount of the secured claim. Setoff in the face amount of a creditor's claim likewise requires valuation. Part II discusses §506(a) and §553 and how they may limit, in appropriate cases, the setoff right to less than the face amount of a creditor's claim. Part II shows that this reading of the Bankruptcy Code is not only consistent with §553, but also readily accepted under §553. Part II continues with a more detailed examination and analysis of §553. Part III compares the different kinds of setoffs with liens and other creditors' rights and shows that certain setoffs compare well with creditors who enjoy no special bankruptcy treatment, even though these creditors were well-positioned until bankruptcy. Part IV sets forth an explanation of why the intuitions regarding the preferential aspect of setoffs were curbed by a policy goal which has become anachronistic. Part V discusses valuation of setoff rights in bankruptcy. Part VI addresses post-bankruptcy setoff rights and inquires as to the effects of exempt property, debt discharge and confirmation on setoff rights. Some setoffs deserve validation in full in bankruptcy proceedings, even after bankruptcy proceedings have come to discharge or confirmation. Others deserve treatment no different than gifts by insolvents. The remaining setoff claims require careful handling.