What is a Cramdown?

A cramdown is a debt repayment plan that a bankruptcy court forces a bankrupt entity's creditors to accept, typically over the objections of one or more classes of creditors (usually secured creditors). A cramdown usually involves the assistance of a bankruptcy court in allowing a debtor to alter the terms of a contract with a creditor.

This approach has been especially valuable for forcing secured lenders to accept a reorganization plan. The terms of this plan involve paying creditors less than the full amount that they are owed, on the grounds that this plan will pay creditors more than would be the case if the bankrupt entity were to liquidate instead. Cramdowns were originally used in Chapter 13 personal bankruptcies, and were later adopted for use in Chapter 11 bankruptcies. A key requirement of a cramdown is that the plan is equitable for all creditors who are owed funds.

The cramdown term is a contraction of the concept of cramming the repayment solution down the throats of creditors, thereby implying that there will be resistance to the plan.

Advantages of a Cramdown

There are several advantages associated with a cramdown, which are as follows:

Debtor retains control of assets. The debtor can retain control of the most critical assets needed to continue operating the business, which may allow it to avoid liquidation.
Debtor reduces its debts. The cramdown arrangement will likely reduce the amount of outstanding debt, to a level that the debtor can more realistically pay off.
Better debt repayment terms. The cramdown arrangement may provide the debtor with longer debt repayment terms, so that it has a better chance of paying off what it owes.