What Is a Cramdown?
A cramdown is the laying on of a bankruptcy reorganization plan by a court despite any objections by certain classes of creditors. A cramdown is often utilized as a into a receive of the Chapter 13 bankruptcy filing and involves the debtor changing the terms of a contract with a creditor with the supporter of the court. This provision reduces the amount owed to the creditor to reflect the fair market value of the collateral that was adapted to to secure the original debt.
Key Takeaways
- Cramdowns are reductions in the amount owed to creditors, often part of a Chapter 13 bankruptcy send in.
- Cramdown provisions allow bankruptcy courts to ignore objections by creditors to recognize debts.
- Cramdowns are often employed with secured debts, such as auto and furniture, but not permitted for mortgages on primary residences.
- The term “cramdown” get from the idea that the loan changes are “crammed down” creditors’ throats.
- Secured creditors will time again do better in a Chapter 13 reorganization than unsecured creditors.
How a Cramdown Works
A cramdown provision (also discerned as “cram-down”) is primarily used on certain secured debts, such as a car or furniture. Cramdowns are not permitted on mortgages for homes that around as a primary residence.
Outlined in Section 1129(b) of the Bankruptcy Code, the cramdown provision allows a bankruptcy court to go-by the objections of a secured creditor and approve a debtor’s reorganization plan as long as it is “fair and equitable.”
The term “cramdown” comes from the construct that the loan changes are “crammed down” creditors’ throats. A cramdown may be called a “cram-down deal” to refer to any unfavorable arrangement forced on creditors by circumstance. In personal bankruptcy, a debtor may either renegotiate a loan through a Chapter 13 reorganization (utilizing a cramdown) or endanger losing everything through a Chapter 7 filing, which gives secured creditors far more leverage.
Special Cogitations
Secured creditors will often do better in a Chapter 13 reorganization than
Example of a Cramdown
Cramdowns were historically behaved in the context of Chapter 13 personal bankruptcies but later spread to Chapter 11 corporate bankruptcies as borrowers attempted to decrease their debt loads. The courts extended the restrictions for loans backed by primary residences to Chapter 11 with the Bankruptcy Emend Act of 1994.