What is “cramdown” in a Chapter 11 bankruptcy?

Cramdown is a bankruptcy law term that describes when a court pays off or restructures a debt partially, or sometimes fully, in Chapter 11 bankruptcy proceedings. In Chapter 11, creditors typically file a claim to receive a portion of what they are owed. Depending on the circumstances, the court can grant part or all of the debt to be paid off. In Virginia, a cramdown occurs when a court approves a payment plan that gives a debtor more favorable terms than what they originally agreed to with the creditor. This usually happens when the court deems that the creditor will not be able to recover the full amount of their debt without a cramdown. For instance, if a debtor was originally expected to pay back $50,000 to a creditor, but the market rate for similar debt is only $35,000, the court might grant the debtor a cramdown for the $35,000. This would keep the creditor from losing the full amount of their debt and would allow the debtor to pay a reduced amount that is more in line with current market rates. Cramdowns are beneficial for debtors, as they help ease the burden of repayment on them. At the same time, creditors are still able to recover some of their losses. However, creditors usually try to avoid cramdowns because they stand to lose a larger portion of their debt than they would with a full repayment.

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What is “cramdown” in a Chapter 11 bankruptcy?

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