LLC as Both Debtor and Creditor in Bankruptcy
Full Question:
Answer:
Assuming all other qualifications are met, it is possible for a debtor to file bankruptcy even thouh a related entity is a creditor. It is possible that a right of setoff may apply. Setoff is governed by section 553 of the Bankruptcy Code which provides:
"Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such a creditor against the debtor that arose before the commencement of the case . . ."
Debts are mutual when they are owed to and from the same entity and in the same capacity. To establish a valid right to setoff under section 553 of the Bankruptcy Code, the party must prove:
(i) a debt owed to the debtor which arose before the commencement of the bankruptcy case;
(ii) a claim against the debtor which arose before the commencement of the bankruptcy case; and
(iii) that the debt and claim are mutual obligations.
