Composition with Creditors

A contract made by an insolvent or financially pressed debtor with two or more creditors in which the creditors agree to accept one specific partial payment of the total amount of their claims, which is to be divided pro rata among them in full satisfaction of their claims.

A composition with creditors is an agreement not only between the debtor and the creditors but also between the creditors themselves to accept less than what each is owed. It is a contract and such an arrangement is largely governed by contract law. There must be a meeting of the minds or mutual assent between the debtor and the creditors before a composition is created. A debtor must accept an offer by the creditors to accept partial payment of the amounts outstanding in order for the composition to be binding. The creditors themselves must also agree to the amount they will accept in satisfaction of their claims. They rely on mutual concessions of their rights to full payment in order to further the common purpose of securing their claims.

No standard form is required for a composition with creditors to be valid. A debtor can enter individual agreements with each creditor if it is clear that each follows a common purpose. All the creditors of a debtor do not have to agree to a composition. Those who do not participate are not bound by it.

Like any contract, a composition with creditors must be supported by consideration to be enforceable. Each creditor's promise to accept a pro rata share of the partial payment, as opposed to full payment of what is due, is consideration for the other creditors and the debtor. The surrender of debtor's right to file a petition for BANKRUPTCY is deemed consideration for the creditors.

Failure to obey the terms of a composition provides a basis for a lawsuit for breach of the agreement. The debtor is released from the duty of payment only after he or she has complied with the payment provisions. All the debts that are part of a composition are extinguished once a composition has been terminated.

A sample composition with creditors.

Advantages

A composition with creditors usually benefits a debtor more than bankruptcy because it accomplishes the same end—discharge of all or most of a debtor's debts—without the stigma of bankruptcy. Unlike a bankruptcy discharge, a composition does not preclude future bankruptcy for six years. Creditors, however, are often reluctant to enter into a composition and those who refuse to do so are not affected by its terms.