practice, contracts. 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. 2. 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. See Set off. 3. Defalcation also signifies the act of a defaulter. The bankrupt act of August 19, 1841, (now repealed), declares that a person who owes debts which have been created in consequence of a defalcation as a public officer, or as executor, administrator, guardian or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. The act of a defaulter; misappropriation of trust funds or money held in any fiduciary capacity; failure to properly account for such funds. Usually spoken of officers of corporations or public officials. Also set off. The diminution of a debt or claim by deducting from it a smaller claim held by the debtor or payor.