A more thorough explanation:

Definition: Mutual debts refer to the situation where two parties owe each other money. In bankruptcy, mutual debts are used for setoff purposes. This means that if one party owes money to the other, they can use that debt to offset the amount they owe. This is only possible if the debts are owed between parties acting in the same capacity, even if the debts are not of the same type and did not arise from the same transaction.

Example 1: Company A owes Company B $10,000 for services rendered. At the same time, Company B owes Company A $5,000 for goods delivered. In this case, there is mutual debt between the two companies. If Company A files for bankruptcy, Company B can use the $5,000 debt to offset the $10,000 debt owed to them.

Example 2: John owes $1,000 to his friend Tom for a personal loan. At the same time, Tom owes John $500 for a different loan. In this case, there is no mutual debt because the debts are not owed between parties acting in the same capacity. Therefore, Tom cannot use the $500 debt to offset the $1,000 debt owed to him by John.

The examples illustrate the definition of mutual debts. In Example 1, both companies owe each other money, and the debts are owed between parties acting in the same capacity. Therefore, the mutual debt can be used for setoff purposes. In Example 2, the debts are not owed between parties acting in the same capacity, so there is no mutual debt.