In the past few years, there have been many bankruptcy debtors taking advantage of the falling real estate prices by utilizing a process known as a “cramdown.” The cramdown is available to debtors in a reorganization (Chapter 11, 12 or 13) and can be difficult for lenders to navigate. This article explains the cramdown, how to oppose it, and why creditors might be willing to have their security interest substantially reduced.
Cramdown Basics
A cramdown is just as unpleasant as it sounds. It is a two-step procedure in reorganization bankruptcies (usually a Chapter 13, but also available in a Chapter 11 or 12) that “crams down” a lender’s secured position. Debtors qualify for one when the property has a loan that is only partially secured. Unlike a lienstrip, which is only applicable when a loan is entirely unsecured, a cramdown is available when the loan is more than the value of the property, but is still partially secured. This is because a cramdown will reduce the value of the loan to only the secured amount and convert the rest of the loan into unsecured debt. The unsecured portion is typically paid out at pennies on the dollar.
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