Cramdown Definition

What Is a Cramdown?

A cramdown is the imposition of a bankruptcy reorganization plan by way of a court docket without reference to any objections by way of sure classes of creditors. A cramdown is regularly implemented as a part of the Chapter 13 bankruptcy filing and involves the debtor changing the words of a contract with a creditor with the help of the court docket. This provision reduces the amount owed to the creditor to duplicate the truthful market value of the collateral that was once used to secure the original debt.

How a Cramdown Works

 A cramdown provision (ceaselessly known as “cram-down”) is basically used on sure secured cash owed, harking back to a automotive or furniture. Cramdowns aren’t licensed on mortgages for properties that serve as a primary place of abode.

Outlined in Phase 1129(b) of the Bankruptcy Code, the cramdown provision lets in a bankruptcy court docket to disregard concerning the objections of a secured creditor and approve a debtor’s reorganization plan as long as it is “truthful and equitable.” 

The time frame “cramdown” comes from the concept that that the loan changes are “crammed down” creditors’ throats. A cramdown is often referred to as a “cram-down deal” to talk over with any adversarial deal harassed on creditors by way of circumstance. In non-public bankruptcy, a debtor would most likely each renegotiate a loan via a Chapter 13 reorganization (the use of a cramdown) or probability shedding the whole thing via a Chapter 7 filing, which gives secured creditors far more leverage.

Explicit Considerations

Secured creditors will regularly do upper in a Chapter 13 reorganization than unsecured creditors, and are maximum ceaselessly the ones with objections. The unsecured creditor’s very best coverage towards an unwanted reorganization plan is maximum ceaselessly to steer clear of arguing whether or not or no longer the plan is truthful and equitable and to as a substitute downside whether or not or no longer the debtor can meet the plan’s duties. The cramdown has been a precious software to pressure recalcitrant secured lenders to easily settle for a reorganization.

Cramdowns could also be used on non-public belongings, harking back to a automobile, as long as a minimum time period has passed (in line with the precise asset—910 days for a automobile and a twelve months for various belongings). If the minimum time period is not met then a cramdown cannot be implemented and the debtor will however owe the original, agreed-to sum.

Bankrupt debtors with mortgages on investment properties (not their primary place of abode) are maximum ceaselessly required to pay them off inside of 3 to 5 years after a cramdown. This temporary point in time creates issues for a variety of debtors no longer ready to pay such sums in this kind of temporary period.

Example of a Cramdown 

Cramdowns were historically performed inside the context of Chapter 13 non-public bankruptcies then again later spread to Chapter 11 corporate bankruptcies as borrowers attempted to scale back their debt so much. The courts extended the constraints for loans backed by way of primary apartments to Chapter 11 with the Bankruptcy Reform Act of 1994. 

Right through the financial crisis of 2008, cramdowns were another time discussed so to take care of the subprime mortgage crisis. Proposed efforts to remove the cramdown prohibition on mortgages in the future failed, as there was once too great an opportunity that it’s going to undermine the U.S. financial software by way of prompting monetary establishment screw ups and making properties unaffordable on account of hugely inflated interest rates.