Composition with creditors is an agreement between a debtor and two or more creditors, where the debtor agrees to pay the creditors a reduced amount to settle the debt. This agreement, known as a composition, is preferred by the creditors as they would rather receive some payment than none at all. Once the agreement is fulfiled, the debtor is relieved of the full amount owed to the participating creditors. It is important to note that this type of agreement differs from the preexisting-duty rule, as the debtor cannot claim that they already owed the money before the agreement was made. Composition with creditors is also referred to as creditors’ composition or at-termoiement. In the past, this agreement was also used to resolve disputes between injured parties, where the injured party would accept monetary or material compensation instead of seeking revenge. This practice helped to prevent further violence and promote peace.
Composition with creditors is an agreement between a debtor and multiple creditors to adjust or eliminate an obligation for a reduced amount. It involves the debtor and multiple creditors agreeing that the debtor will pay the creditors less than the total amount owed as a complete settlement. For instance, if a debtor owes $10,000 to two creditors, they may agree to pay a total of $6,000 to both creditors instead of the full amount. By fulfiling this agreement, the debtor is released from the debts owed to the participating creditors. Composition with creditors is a legal method for debtors to resolve their debts with creditors, providing an alternative to bankruptcy and enabling them to repay their debts in a manageable manner. In earlier societies, such as Anglo-Saxon, a composition with the injured party was recognized as a means to discourage acts of revenge. It involved offering monetary compensation or goods as satisfaction for an injury. For example, John owes $20,000 to three creditors. He negotiates a composition with creditors and agrees to pay a total of $12,000 to all three creditors. Through the fulfilment of this agreement, John is fully discharged from the debts owed to the participating creditors. In this scenario, John is able to settle his debts with creditors by negotiating a composition with them. He agrees to pay a reduced amount, and by fulfiling this agreement, he is completely released from the debts owed to the participating creditors.
A composition with creditors is a legal agreement between a debtor and their creditors to settle outstanding debts for a reduced amount. It allows the debtor to avoid bankruptcy and provides creditors with a higher chance of recovering some of their money.
The debtor proposes a repayment plan to their creditors, outlining the reduced amount they can afford to pay. If the majority of creditors agree to the proposal, it becomes binding on all parties involved. The debtor then makes payments according to the agreed-upon terms until the debts are fully settled.
In most jurisdictions, any individual or business facing financial difficulties can propose a composition with creditors. However, certain restrictions may apply, such as the debtor’s ability to demonstrate their inability to pay the full amount owed.
No, not all creditors have to agree to the composition. In many jurisdictions, a majority of creditors (usually 75% or more) must agree to the proposal for it to be binding on all creditors. However, the specific requirements may vary depending on the jurisdiction.
If a creditor does not agree to the proposed composition, they may still be bound by it if the majority of other creditors accept the proposal. However, they may have the option to challenge the composition in court if they believe it is unfair or prejudicial to their interests.
Once a composition is agreed upon and becomes binding, it is generally difficult to modify or renegotiate its terms. However, in exceptional circumstances, such as a significant change in the debtor’s financial situation, it may be possible to seek court approval for modifications.
Entering into a composition with creditors may have a negative impact on your credit score. It indicates that you were unable to fulfill your financial obligations as originally agreed. However, it is generally less damaging than filing for bankruptcy, and with time and responsible financial behavior, you can rebuild your credit.
In most cases, all types of debts can be included in a composition with creditors, including loans, credit card debts, and business debts. However, certain debts, such as child support, alimony, and certain tax obligations, may not be dischargeable through a composition.
If you have already filed for bankruptcy, it may not be possible to propose a composition with creditors. Bankruptcy proceedings have their own rules and procedures, and it is advisable to consult with a bankruptcy attorney to understand your options.
A composition with creditors can provide several benefits, including avoiding bankruptcy, reducing the total amount of debt owed, and allowing the debtor to regain control of their finances. It also provides creditors with a higher chance of recovering some of their money compared to bankruptcy proceedings.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
- Page URL:https://dlssolicitors.com/define/composition-with-creditors/
- Modern Language Association (MLA):Composition With Creditors. dlssolicitors.com. DLS Solicitors. May 09 2024 https://dlssolicitors.com/define/composition-with-creditors/.
- Chicago Manual of Style (CMS):Composition With Creditors. dlssolicitors.com. DLS Solicitors. https://dlssolicitors.com/define/composition-with-creditors/ (accessed: May 09 2024).
- American Psychological Association (APA):Composition With Creditors. dlssolicitors.com. Retrieved May 09 2024, from dlssolicitors.com website: https://dlssolicitors.com/define/composition-with-creditors/
Our team of professionals are based in Alderley Edge, Cheshire. We offer clear, specialist legal advice in all matters relating to Family Law, Wills, Trusts, Probate, Lasting Power of Attorney and Court of Protection.
All author posts