Cramdown

DEFINITION of 'Cramdown'

A bankruptcy concept that is often employed to obtain a Chapter 11 bankruptcy reorganization plan while there are still objections from one or more creditors. Cramdown allows the bankruptcy courts to modify loan terms subject to certain conditions in an attempt to have all parties come out better than they would have without such modifications. The conditions are mainly that the new terms are fair and equitable to all parties involved.



BREAKING DOWN 'Cramdown'

The term "cramdown" comes from the idea that the loan changes are "crammed down" creditors' throats - they can either renegotiate the loan through a Chapter 11 reorganization, or lose everything through a Chapter 7.

Secured creditors will often do better in a Chapter 11 reorganization than unsecured creditors, and are are usually the ones with objections. The unsecured creditor's best defense against an unwanted reorganization plan is usually to stay away from arguing whether the plan is fair and equitable and to instead challenge whether the debtor can meet the plan's obligations.

During the financial crisis of 2008, cramdown was used to help troubled mortgage borrowers by allowing the bankruptcy courts to alter mortgage terms, subject to certain conditions, in an attempt to keep borrowers from foreclosure when one or more tranches of the mortgage did not agree to loan modification.

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