Explain how a composition agreement worksWhy would a credito

Explain how a composition agreement works.Why would a creditor be willing to agree to one?

Solution

With reference to \"Legal definition\" - At the common law a composition agreement is an agreement made between an embarrassed or insolvent debtor and two or more of his creditors, each creditors who entering into the agreement would be paid a specified amount, less than the whole of their claims and the creditors agree to accept such payment in full satisfaction of their claims

For example - 30% on dollar, the initial claim at this point are liquidated. If the debtor does not fulfill the agreement, then what is due them under it may be demanded by the creditors, rather than the full amount.  

Like any contracts, a composition with creditors are supported by consideration to be enforceable. Each creditors promise to accept pro rata share of the partial payment, in contrast to full payment, is consideration for the others creditors and the debtor.

Failure to fulfill the terms of a composition provides a basis for a lawsuit for breach of the agreement. Only after he or she has complied with the payment provisions the debtor is released from the duty of payment. Once a composition has been terminated, all the debts that are part of a composition are extinguished.