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The reduction of the claim of one of the contracting parties against the other, by deducting from it a smaller claim due from the former to the latter.
The law operates this reduction in certain cases, for if the parties die or are insolvent, the balance between them is the only claim; but if they are solvent and alive, the defendant may or may not defalcate at his choice.
Defalcation also signifies the act of a defaulter. The bankrupt act of 1841 (now repealed), declares that a person who owes debts which have been created in consequence of a defalcation as a public officer, or as executor, administrator, guardian or trustee, or while acting in any other fiduciary capacity, shall not have the benefit of that law.