DEFINITION of 'Defalcation'
1. Combining two or more debts to create one total debt. Defalcation can be legally carried out upon request or in death of one of the parties.
2. Theft or misuse of funds which were under the control of the defalcator but not owned by them. Defalcation is a form of embezzlement through the allocation of funds, or failure to account for received funds.
BREAKING DOWN 'Defalcation'
1. For example if Peter had a $100 debt to Diana and Diana had a debt to Peter for $14, the debt could be combined. Peter would then owe Diana $86. This is not always legally possible without the consent of both parties.
2. The term defalcation is usually used in the context of public officials misappropriating public funds. There is a requirement of one party to be in control of someone else's account while allocating the funds in an inappropriate manner.