1. Defaulting on a debt or other obligation by one who has 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. For instance, A owes $10 to B and B owes A $3; they agree to "defalk" , resulting in A now owing $7 to B. The two previous debt instruments are canceled and replaced by the new one. See also "novation".