How Does a Bankruptcy Cram Down Work?

After a debtor files for bankruptcy, the debtor is typically required to file a bankruptcy plan.  The contents of the plan differ depending on whether the debtor is filing for Chapter 11 or Chapter 13 relief. 

Bankruptcy Cram Downs

Sometimes creditors object to the debtor’s proposed bankruptcy plan.  If the bankruptcy court requires the creditors to be bound by the plan over their objections it is known as a cram down.  A cram down on investment property is one of the most common benefits afforded by filing bankruptcy.  In this type of cram down, investment property mortgages are reduced, the interest rate is change or the life of the loan is extended as part of the bankruptcy repayment plan.

Historically, debtors were able to cram down debt with bankruptcy but the cram down could not include the debtor’s primary residence. 

Application of Cram Down to Primary Residences

While it is not yet law, there is a specific movement underway to allow debtors to cram down debt with bankruptcy for their personal homes as well. Since the mortgage crisis began a few years ago, many people find themselves in an upside down mortgage.  An upside down mortgage is one in which the debtor owes more on the property than the property is worth. 

Those who favor cram down solutions to personal debt would allow a debtor to reduce principle balance of the mortgage.  Pursuant to a cram down approach, the creditor would have no choice but to accept the bankruptcy trustee’s order to reduce principle balance on the mortgage.

Creditors Rights in a Cram Down

If the bankruptcy court imposes a cram down then the creditor has the right to appeal.  The creditor will argue that the plan approved by the court over its objection was not fair and equitable and that the creditor deserves greater compensation than the court provided.

Both creditors and debtors benefit from obtaining counsel from a bankruptcy lawyer before a cram down occurs.  A bankruptcy attorney can argue the debtor’s or creditor’s position to the bankruptcy court in an attempt to support or prevent the cram down and make sure that all of the debtor’s or creditor’s rights are protected.