Cramdown
What Is a Cramdown?
A cramdown is the burden of a bankruptcy reorganization plan by a court in spite of any protests by certain classes of creditors. A cramdown is in many cases used as a part of the Chapter 13 bankruptcy filing and includes the debtor changing the terms of a contract with a creditor with the assistance of the court. This provision reduces the amount owed to the creditor to mirror the fair market value of the collateral that was utilized to secure the original debt.
How a Cramdown Works
A cramdown provision (otherwise called "pack down") is essentially utilized on certain secured debts, like a vehicle or furniture. Cramdowns are not permitted on mortgages for homes that act as a primary residence.
Illustrated in Section 1129(b) of the Bankruptcy Code, the cramdown provision permits a bankruptcy court to overlook the protests of a secured creditor and support a debtor's reorganization plan for however long it is "fair and equitable."
The term "cramdown" comes from the possibility that the loan changes are "packed down" creditors' throats. A cramdown might be called a "pack down deal" to allude to any unfavorable deal forced on creditors by situation. In personal bankruptcy, a debtor may either revise a loan through a Chapter 13 reorganization (using a cramdown) or risk losing everything through a Chapter 7 filing, which gives secured creditors undeniably more leverage.
Special Considerations
Secured creditors will frequently improve in a Chapter 13 reorganization than unsecured creditors, and are typically the ones with protests. The unsecured creditor's best defense against an undesirable reorganization plan is for the most part to avoid contending whether the plan is fair and equitable and to rather challenge whether the debtor can meet the plan's obligations. The cramdown has been a significant tool to force refractory secured lenders to acknowledge a reorganization.
Cramdowns might be utilized on personal property, like a vehicle, up to a base period of time has elapsed (in light of the particular resource — 910 days for a vehicle and a year for other property). In the event that the base time span isn't met then a cramdown can't be used and the debtor will in any case owe the original, consented to sum.
Bankrupt debtors with mortgages on investment properties (not their primary residence) are generally required to pay them off inside 3 to 5 years after a cramdown. This short cutoff time makes issues for some debtors unfit to pay such sums in such a short period.
Illustration of a Cramdown
Cramdowns were generally acted with regards to Chapter 13 personal bankruptcies yet later spread to Chapter 11 corporate bankruptcies as borrowers endeavored to reduce their debt loads. The courts extended the limitations for loans backed by primary residences to Chapter 11 with the Bankruptcy Reform Act of 1994.
During the financial crisis of 2008, cramdowns were again examined as a method for taking care of the subprime mortgage crisis. Proposed efforts to eliminate the cramdown disallowance on mortgages in the long run failed, as there was too great a risk that it would sabotage the U.S. financial system by provoking bank disappointments and making homes exorbitant due to massively swelled interest rates.
Features
- Cramdowns are reductions in the amount owed to creditors, frequently part of a Chapter 13 bankruptcy filing.
- Secured creditors will frequently improve in a Chapter 13 reorganization than unsecured creditors.
- Cramdown provisions permit bankruptcy courts to disregard protests by creditors to perceive debts.
- Cramdowns are frequently utilized with secured debts, like auto and furniture, yet not permitted for mortgages on primary residences.
- The term "cramdown" comes from the possibility that the loan changes are "packed down" creditors' throats.
