What is a Composition Agreement? A Legal Overview
Definition & Meaning
A composition agreement is a legal arrangement between a debtor who is struggling financially and two or more of their creditors. In this agreement, the creditors agree to accept a reduced payment, which is less than the total amount owed. In return, they consider this reduced payment as full satisfaction of their claims against the debtor. Essentially, this agreement serves as a new understanding that replaces the original debt, provided the debtor fulfills their payment obligations.
Legal Use & context
Composition agreements are primarily used in civil law, particularly in bankruptcy and debt settlement contexts. They allow debtors to manage their financial obligations more effectively by negotiating lower payments with creditors. Users may find it beneficial to utilize legal templates from US Legal Forms to create a composition agreement that meets their specific needs. This can be a straightforward process for individuals looking to resolve their debts without resorting to bankruptcy.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A small business owner owes $50,000 to three creditors. Due to financial difficulties, they negotiate a composition agreement where each creditor agrees to accept $30,000 total, distributed among them, as full payment of their claims. Once the business owner pays this amount, the creditors cannot pursue the remaining balance.
Example 2: An individual has credit card debts totaling $20,000. They enter into a composition agreement with their creditors, agreeing to pay $12,000 in total. The creditors accept this amount and consider the debt settled upon payment. (hypothetical example)