Composition With Creditors Law and Legal Definition

A composition with creditors is an agreement between an insolvent or embarrassed debtor and two or more of his or her creditors in which the creditors, for some consideration, such as an immediate payment, agree to accept that or a future payment in full satisfaction of their respective claims, even though the payment is less than the amount owing on their claims. Such a composition is a compromise for the settlement of debts already incurred and does not embrace an agreement to alter the obligation of a contract with respect to future performance, nor is it an arrangement to pay the creditors in full at a later date. However, in some jurisdictions a composition may consist of an agreement by the creditors to extend the time in which the debtor may pay their claims, or an agreement that no creditor will receive any part of his or her claim. Composition agreements have to a great extent been superseded by proceedings under the Federal Bankruptcy Act or by state insolvency laws.