Under a composition agreement,
A)creditors agree to accept less than the face amount of their claims.
B)debtors in financial difficulty transfer assets "without recourse."
C)a creditors' committee is initiated with a plan of settlement proposed by the debtor.
D)the debtor petitions for relief in a bankruptcy court.

Question

Quizplus · Accepted Answer

A composition agreement is a legal agreement between a debtor and its creditors where the creditors agree to accept a reduced amount to settle outstanding debts. The agreement usually requires the approval of a certain percentage of creditors before it can be implemented.

Answer: C 
 A composition agreement may involve the creation of a creditors' committee that negotiates with the debtor to propose a plan of settlement. The plan may involve a payment schedule or other arrangements to satisfy the outstanding debts.

Answer: B and D are not correct choices because they do not accurately describe a composition agreement. Transferring assets "without recourse" typically refers to a sale of assets where the seller is not responsible for any future liabilities or claims related to the assets sold. Filing for relief in a bankruptcy court is a separate legal process that may involve a composition agreement as part of a bankruptcy reorganization plan.

Under a Composition Agreement