Business Bankruptcy and Creditors’ Rights: What is Recoupment?


May 26, 2019

Bankruptcy Lawyer Clearwater, FL

The legal right of ‘recoupment’ is something that all creditors should understand. Indeed, recoupment, when used effectively, offers a potentially powerful tool for debt collection.

However, this action is only available in limited circumstances. Experienced bankruptcy attorneys explain what you need to know recoupment, including the benefits as well as the general legal requirements that come with using this collection action.

Understanding Recoupment

Notably, recoupment is not found directly in the United States bankruptcy code. Instead, recoupment is a doctrine that has been developed by the courts. It is an equitable remedy that may be available to creditors that have mutual debts with another firm that arise out of the same general transaction. To be clear, if a mutual debt does not arise out of one transaction, it is likely ineligible for recoupment.

For a better understanding of this concept, consider the following example of recoupment in action: Imagine that a company entered into a commercial lease with a landlord. A dispute arose, resulting in the business owing $10,000 to that landlord in unpaid rent obligations. However, the court also found that the landlord fraudulently induced the company into the agreement, resulting in the company sustaining $5,000 in damages. As this was one transaction, recoupment is available as a valid debt collection option.

The Important Distinction Between Recoupment and Setoffs

In the above example, recoupment operates in much the same way as would a setoff. Money is owed to each side, so the debt can be “setoff”, and reduced. However, there are important legal distinctions between debt that is subject to recoupment and debt that is subject to a setoff. While recoupment applies in much more limited circumstances, it is also far more powerful than is a debt setoff.

Indeed, many of the general bankruptcy collection rules do not apply to recoupment collection actions. For example, most courts hold that recoupment is not subject to an automatic stay, making this type of action very valuable in certain complex debt collection situations. Further, while the bankruptcy code does not allow the offsetting of pre-bankruptcy petition debt with post-bankruptcy petition debt, recoupment is not subject to this rule. The bottom line: When mutual debt arises out of one transaction, recoupment offers a particularly powerful collection option.

Contact a Bankruptcy Law Firm Today

A skilled bankruptcy lawyer has extensive experience handling all aspects of bankruptcy and recoupment actions. They are well versed in all areas of bankruptcy law, both individual and business filings.

If you are a company who is struggling with financial difficulties and in need of legal help, please do not hesitate to contact a bankruptcy lawyer in Clearwater, FL from The Law Office of Michael A. Ziegler, P.L. to request a free and confidential review of your case. They can help you decide the best legal course of action for your situation, including assistance with any creditors that are threatening legal action in order to collect debts your company owes.

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