Legal Definitions - cram-down

In bankruptcy law, a cram-down refers to a court-ordered process where a creditor is compelled to accept new terms for a loan, typically by reducing the amount of debt secured by collateral to the current market value of that collateral. This legal mechanism is primarily used in bankruptcy proceedings, such as Chapter 13 (for individuals) and Chapter 11 (for businesses or individuals with high debt), to help debtors reorganize their finances and establish a feasible repayment plan.

Essentially, if the value of an asset securing a loan has decreased significantly below the outstanding loan balance, a bankruptcy court can "cram down" the secured portion of the debt to the asset's current fair market value. Any remaining debt above that value is then reclassified as unsecured debt, which may be paid back at a lower percentage or discharged entirely. It's important to note that a cram-down generally cannot be used to modify the mortgage on a debtor's primary residence in Chapter 13 bankruptcy.

• Example 1: Investment Property Mortgage

  Imagine Sarah owns a rental property that she purchased with a mortgage. Due to a downturn in the local real estate market, the property's value has dropped from $300,000 to $200,000, but she still owes $250,000 on the mortgage. When Sarah files for Chapter 13 bankruptcy, the court could apply a cram-down. This would reduce the secured portion of her mortgage debt from $250,000 to the current market value of the property, which is $200,000. The remaining $50,000 of the debt would then be reclassified as unsecured debt, which Sarah might pay back at a much lower rate or have discharged through her bankruptcy plan. This example illustrates how cram-down can be used for mortgages on properties that are not the debtor's primary residence.

• Example 2: Business Equipment Loan

  Consider a small manufacturing business, "Precision Parts Inc.," which filed for Chapter 11 bankruptcy. The company has a loan of $150,000 secured by a specialized piece of machinery. However, due to technological advancements and wear and tear, the machinery's current market value is only $80,000. Through a cram-down, the bankruptcy court could reduce the secured portion of the loan to $80,000, reflecting the current value of the collateral. The remaining $70,000 of the debt would become an unsecured claim, allowing Precision Parts Inc. to propose a more manageable repayment plan for the secured portion and potentially restructure or discharge the unsecured portion, aiding in the company's reorganization.