Cramdown

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Related to Cramdowns: Cramming Down

Cramdown

The ability of the bankruptcy court to confirm a plan of reorganization over the objections of some classes of creditors. This often involves resetting the amount of principal that the bond holders are owed. Related is a mortgage cramdown. Here the home owner cannot pay the mortgage because of financial distress and, indeed, the mortgage could be a higher value than the house. A cramdown resets (lower) the principal amount of the mortgage. This may allow the homeowner to stay in the house (avoid foreclosure).

Cramdown

In bankruptcy, the ability of a court to formulate and implement a Chapter 11 reorganization plan over and above the objections of creditors. Generally speaking, unsecured creditors object to a debtor's bankruptcy because they have no recourse for retrieving the debt. The rationale behind a cramdown is the fact that unsecured creditors will usually receive part of the debt back under a Chapter 11 reorganization, but would receive nothing in a Chapter 7 liquidation. Cramdown is therefore thought to be the least negative option for both the debtor and the creditors. Courts are required, however, to formulate a cramdown that is as equitable as possible for all parties.
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Policy may also encourage lender renegotiation by giving more bargaining power to borrowers in these instances, through legal procedures such as bankruptcy and cramdown.
ruled that the appropriate valuation standard for a Chapter 13 cramdown,
The senior creditor may believe such a decision is preferable to rejection and its attendant risk of having to accept an inferior plan through further negotiation or cramdown, or smaller proceeds from liquidation.
Moreover, our mechanism alone among these proposals easily can be incorporated as a market test for absolute priority in a cramdown under current law, because absent a dispute over valuation, or until the point of such a dispute, the bankruptcy process can proceed as under current practice.
And just as important, it did not contain a provision on mortgage cramdowns.
For transactions with pool policies, which exclude losses due to cramdowns and other bankruptcy related losses, the Duff & Phelps guidelines set forth a minimum additional reserve of typically $100,000.
Another speaker at NPC confirmed that the Democratic leadership is firmly behind pursuing cramdowns.
And finally, whether its legislative fights like cramdowns or regulatory tests like the corporate stabilization plan or the exigent economic times, what you didn't hear was credit unions backing down from a challenge.
Cramdowns of first lien mortgages on a debtor's principal residence is permitted, then, only under Chapter 11.
Concern has been expressed that recent increases in personal bankruptcy filings, particularly under Chapter 11, might lead to an increase in cramdowns.
Unknowns include the final language of the legislation, how the risk of bankruptcy cramdowns will affect the pace and degree of loan modifications and what type of increased incentive the new law might provide for borrowers to declare bankruptcy.
As we go to press, we have, so far, staved off one dangerously bad, crisis-driven policy idea--bankruptcy cramdowns.