Insolvency Setoff

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A standard problem faced by legal systems addressing insolvency such as bankruptcy is how to handle claims of creditors against the debtor when there is also a claim of the debtor against the same creditor. One possibility would be to require the creditor to pay its debt to the debtor in full but require the debtor to pay the creditor according to the priorities of the insolvency distribution system. Often, this will mean that the creditor will get very little. The alternative, sometimes called setoff, permits the creditor to "net out" its claim against the debtor in the same way it might have done without any problem had no insolvency occurred.
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Contributed by: Seth J. Chandler (March 2011)
Open content licensed under CC BY-NC-SA
Snapshots
Details
Snapshot 1: A situation in which a debtor with $50,000 in assets owes the first creditor $70,000 and owes the second creditor $90,000 but the first creditor also owes the debtor $30,000. No setoff permitted.
Snapshot 2: A situation in which a debtor with $50,000 in assets owes the first creditor $70,000 and owes the second creditor $90,000 but the first creditor also owes the debtor $30,000. Setoff permitted.
Snapshot 3: A situation in which a debtor with $50,000 in assets owes the first creditor $10,000 and owes the second creditor $90,000 but the first creditor also owes the debtor $30,000. Setoff permitted. Only net cash flows shown.
Snapshot 4: A situation in which a debtor with $50,000 in assets owes the first creditor $70,000 and owes the second creditor $90,000 but the first creditor also owes the debtor $30,000. Setoff permitted.
Under American bankruptcy law, recoupment is a type of setoff that arises when the mutual debts arise out of the same transaction. It is generally permitted more frequently than when the mutual debts arise out of unrelated matters.
Permanent Citation
"Insolvency Setoff"
http://demonstrations.wolfram.com/InsolvencySetoff/
Wolfram Demonstrations Project
Published: March 7 2011