Defalcation Definition:

? 1. Defaulting on a debt or other obligation such to account for public or trust funds.

Usually used in the context of public officials.

? 2. Defalcation has another legal meaning referring to the setting-off of two debts owed between two people by the agreement to a new amount representing the balance.

I owe you $7 and you owe me $3; we agree to "defalk"; the result is that I owe you $4.

This is a form of novation.