A composition settlement is a voluntary debtor-creditor agreement in which two or more creditors agree to accept less than the full amount due from a debtor. According to FindLaw.com, although a composition settlement is common in bankruptcy proceedings, it is also becoming a common tactic for paying a creditor without resorting to filing a formal bankruptcy petition.
How a Composition Settlement Works
Although state laws vary, most consider composition settlements to be legal contracts. A debtor starts the process by submitting a composition contract offer to creditors. According to JRank.org, the offer typically includes a lump sum to be divided proportionally between the named creditors who accept the offer. In return for receiving at least some of the debt owed, creditors agree to accept less than the full amount due and mark the debt paid-in full. There is no standard form required to create a composition settlement and creditors who decline are not bound by it.