Step 1 — The Facts
Step 2 — The Analysis
1. Does the debtor's claim arise out of the same contract, transaction, or occurrence as your invoice?
2. Is the debtor's claim liquidated (fixed in amount) or unliquidated?
3. Has the debtor's claim exceeded the California statute of limitations as an affirmative claim?
4. Are the parties in mutual capacity (each party owes the other in its own name, not through a subsidiary or affiliate)?
5. Is either party in (or imminently filing) bankruptcy?
How to Read the Result
Recoupment — defensive, survives SOL, limited to the claim amount
A recoupment defense arises from the same transaction. It is a reduction of your claim, not an independent counter-claim. Critically, recoupment survives statutes of limitations that would bar an affirmative claim — the debtor can reduce your invoice even if they could no longer file their own lawsuit. Recoupment is capped at the amount of your claim; the debtor cannot recover affirmatively beyond zero.
California authority: Granberry v. Islay Invs. (1995) 9 Cal.4th 738; Jess v. Herrmann (1979) 26 Cal.3d 131.
Setoff — separate transaction, SOL applies, mutual debts required
Setoff (also called offset or counterclaim in California Code of Civil Procedure §431.70) applies to mutual debts arising from separate transactions. Setoff is subject to the statute of limitations on the counter-claim. CCP §431.70 permits cross-demand setoff only when the cross-demand was not barred by SOL at the time the two claims coexisted. Setoff can exceed your claim and generate affirmative recovery for the debtor.
Bankruptcy setoff — §553
11 U.S.C. §553 preserves pre-petition setoff rights if: (1) debt owed to the creditor arose pre-petition, (2) claim against the debtor arose pre-petition, and (3) debts are mutual. §362(a)(7) stays unilateral setoffs — court approval required. Post-petition claims and debts cannot be set off against pre-petition amounts.
Neither — the defense is cosmetic
If the debtor's "offset" arises from a separate transaction, is barred by the SOL, and the parties lack mutuality, it is not a valid legal defense under California law. Treat it as a negotiation posture — not a legal obstacle — and continue the collection sequence.
What Happens Next
LegalCollects.ai's 30-day sequence treats setoff/recoupment claims as trigger events for legal analysis, not automatic write-downs. When a debtor asserts an offset, the supervising California attorney reviews the classification, calibrates the demand to the net collectible balance where the offset is valid, and preserves the full claim where it is not. Contingency fee is 15% of recovered amount — the same whether you collect $5,000 or $500,000.
Have a Debtor Asserting Setoff or Recoupment?
Submit the claim with the debtor's asserted offset attached. We'll do the classification and pursue the net amount.
Submit a Claim See Pricing