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Effect of Debtor’s Insolvency

Accord and satisfaction deals with a debtors offer of payment and a creditors acceptance of a lesser amount than the creditor originally purported to be owed.  In an accord contract it is typical that the consideration supplied is less than bargained for in the original contract.

In accord contracts that require an amount of consideration that is less than the original, the consideration must be of a different type, i.e. instead of money, debtor offers something in kind. Where the creditor knows that the debtor is insolvent and, in consideration of that fact, accepts part payment of a liquidated demand in full satisfaction, there is an accord and satisfaction.  Further, an agreement by a debtor to forgo the right to file a petition in bankruptcy if the individual creditor agrees to discharge his or her claim upon the payment of a lesser amount, will also support a valid accord and satisfaction.

However, in Prather v. Citizens Nat. Bank of Dallas, 582 S.W.2d 903 (Tex. Civ. App. Waco 1979) an accord and satisfaction was not established where there was no evidence that the creditor knew of the guarantor’s alleged insolvency or regarded the alleged insolvency as consideration for an agreement to release the guarantor from the entire debt.

Inside Effect of Debtor’s Insolvency