If you’re considering Chapter 11 bankruptcy for your business and doing some reading to learn more about it, you’re likely coming across some new and puzzling terminology. Take the word “cramdown.” Just what does that mean?
When creditors are required to accept undesirable terms as the result of a debtor’s reorganization plan in a Chapter 11 or Chapter 13 bankruptcy, those terms are considered to be “crammed down.” The same is also said when a venture capital firm or other investors are required to accept unfavorable terms.
Cramdowns occur when a bankruptcy court changes the terms of a debt over a creditor’s objections to make it easier for the debtor to pay off. Cramdowns are legal under the federal Bankruptcy Code, even if that term doesn’t appear there.
What kinds of debt are most often “crammed down?”
Cramdowns are most often used with secured debt – for example, for vehicle loans. The court will typically allow the creditor to seek the current fair market value (FMV) of the collateral that secures the debt. It should be noted that mortgages — at least on properties that are primary residences — generally aren’t subject to cramdowns.
With an asset that depreciates quickly, like a vehicle or some types of equipment, the FMV may be less than the amount still owed. Therefore, a cramdown could wipe out that debt.
It should be noted, however, that cramdowns can’t be used for recently purchased property. Typically, the asset must have been purchased more than a year ago – and 910 days for vehicles.
Bankruptcy is a highly codified process subject to detailed and often complex regulations. Having experienced legal guidance can help those contemplating it and those who determine that it’s the path forward out of overwhelming debt.