Cramdown

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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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Part III explores the murky jurisprudence surrounding secured-creditor cramdowns and how best to compensate the secured creditors increased risk through plan interest payments.
Court of Appeals for the Fifth Circuit held that bankruptcy courts have flexibility in selecting the date on which to value collateral, "so long as the bankruptcy court takes into account the purpose of the valuation and the proposed use or disposition of the collateral at issue," In so holding, the Fifth Circuit rejected the proposition that a bankruptcy court must value collateral as of either the bankruptcy petition date or the effective date of a cramdown Chapter 11 plan.
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,
Whether the United States government will move in the direction of cramdowns, mandate other forms of relief for homeowners, or maintain the status quo is uncertain.
Maynard discusses the proposed amendment to the Bankruptcy Code to allow for cramdown of home mortgage loans in bankruptcy and analyzes the incentive effects that it will have on modifications outside of bankruptcy.
Mortgage cramdowns is another area that could come up in the CFPA discussions on the Hill.
They argue that allowing these "cramdowns" would make lenders more hesitant to make mortgage loans in the future, since the threat of a loan being modified in this way could make mortgage lending more risky.
419 (1996) (discussing the complexities of valuing companies in cramdowns).
We found several other interesting facts: For example, six of the reorganizations, or 8.8%, were explicitly noted as cramdowns. The total could be as high as 20, or 29%, since these 20 firms satisfied a necessary condition for a cramdown, i.e., at least one impaired class (in this case, equity) rejected the plan (and equity is considered to have rejected the plan if the plan fails to provide distributions to shareholders).
But a string of recent, large chapter 9 cases have featured negotiated settlements and cramdowns that fully preserve underfunded pensions, seemingly at the expense of other stakeholders.
(73) The right to rent plan, therefore, rests somewhere between existing government programs that reward voluntary renegotiation (74) and mortgage cramdowns, which result in involuntary renegotiation of mortgage terms.