What Is a Cramdown in Chapter 13 Bankruptcy?

Feeling buried under the weight of debt is an overwhelming experience. You might be watching your mail for a lawsuit notice or worrying about losing your home. When you have property tied to a loan, like a car or a rental house, the fear can be even worse.

You may have heard the term bankruptcy cramdown, and it sounds like a potential lifeline, but you are not sure what it is. It is a powerful tool available in certain bankruptcy cases that is governed by federal law. A bankruptcy cramdown could change your financial future for the better by offering significant debt relief.

Before you can really grasp how this works, it helps to understand secured debt. This is any debt secured by property, which acts as collateral for the money you borrowed. Your home mortgage and your car loan are the most common examples of secured debts, and failure to make loan payments can lead to foreclosure or repossession.

What Is a Bankruptcy Cramdown?

A bankruptcy cramdown is a provision found within the U.S. Bankruptcy Code that allows a debtor to reduce the principal balance of a secured loan. You essentially “cram down” the loan amount to the current fair market value of the collateral securing it. This option is most commonly used in a Chapter 13 personal bankruptcy but also has a more complex form in a Chapter 11 business bankruptcy.

Imagine you have a loan on a property that is now worth less than the total debt owed. When a cramdown occurs, the bankruptcy court splits that debt into two parts. The first part is a new secured debt equal to the asset’s current value, which must be paid in full through the reorganization plan.

The second part is the remainder of the loan, which becomes unsecured debt. This unsecured portion is treated just like your other general unsecured creditors, such as those for credit card debt or medical bills. It might be paid back at a small fraction or discharged completely, depending on the terms of your approved payment plan.

How Does a Cramdown Work in Real Life?

This might sound a little abstract, so let’s look at a clear example. Let’s say you own a vehicle you have had for a few years. You are trying your best to keep up with your car loans, but things are tough financially.

You still owe $18,000 on your auto loan, but due to depreciation, the car’s current fair market value is only $10,000. Right now, your car is “underwater,” meaning the debt secured by the vehicle is more than the car worth. This is a common problem with depreciating assets like personal property.

If you proceed with a bankruptcy filing under Chapter 13 and request a cramdown, you could change this situation. A judge might approve your request to reduce the secured debt to the car’s value of $10,000. You would then pay this $10,000, plus a court-determined interest rate, over the life of your three-to-five-year repayment plan.

The remaining $8,000 you owed is no longer a secured debt. It gets reclassified as general unsecured debt and is added to the pool with your other unsecured debts. Your Chapter 13 plan generally will provide for a much smaller percentage repayment for this type of debt, offering substantial savings.

What Kinds of Property Can You Cramdown?

A cramdown provision does not work on every type of secured loan. The bankruptcy code has specific rules about what qualifies, which have been shaped over time by decisions in various bankruptcy courts and circuit courts. Understanding these categories is important so you know what options are on the table for your bankruptcy legal case.

Cars, Boats, and Other Personal Property

Vehicles are one of the most common targets for a cramdown. It can make a huge difference in your monthly budget and ability to keep your transportation. But there is a very important limitation you must know, often called the 910-day rule.

This rule states that to cram down a car loan, you must have purchased the vehicle more than 910 days, or about two and a half years, before filing Chapter 13. This rule applies to loans where the money was used to buy the vehicle, known as a purchase-money security interest. The time period is in place to prevent people from buying a car right before a bankruptcy filing just to reduce the loan balance.

This same logic applies to other types of personal property, like a boat or expensive furniture. There is a one-year rule for other personal property financed through a purchase-money security interest. This means you must have bought the item at least one year before filing your bankruptcy case to be eligible for a cramdown on that secured property.

Rental or Investment Properties

Here is where a cramdown can be incredibly powerful for your debtor’s reorganization. The rules are different for real estate that is not your main home. You can use a cramdown on a mortgage for a rental property, a vacation home, or a multi-unit building where you do not live.

For example, if you own a rental condo with a mortgage of $250,000, but its market value has dropped to $180,000, you could propose a plan with a cramdown. A successful Chapter 13 cramdown would reduce the secured mortgage to $180,000. The remaining $70,000 would become unsecured debt, treated far more favorably in your repayment.

This bankruptcy reorganization tool can turn a money-losing property into a profitable one. It can also make your Chapter 13 plan more affordable and likely to succeed. Completing the plan would let you own the property with a much lower loan balance, making it a sound part of your financial future.

Can a Bankruptcy Cramdown Save My Home? (A Hard Truth)

This is the question many people have when they first hear about this tool. The thought of reducing the principal on your home mortgage is very appealing. Sadly, for most people, the answer is no.

The United States Bankruptcy Code has a special “anti-modification clause.” This clause specifically prohibits a bankruptcy chapter from being used to modify the rights of a secured creditor whose claim is secured only by the debtor’s primary residence. This means you cannot use a cramdown to reduce the principal balance of the first mortgage on the house you live in.

This principle was solidified by the Supreme Court in the case of Nobelman v. American Savings Bank. The law is intended to protect the home mortgage market and encourage lenders to offer home loans. So while a cramdown can help with other properties, it generally cannot be used to save your family home from being underwater on its main mortgage.

A Powerful Alternative: Lien Stripping Your Second Mortgage

Just because you cannot cram down your first mortgage does not mean you are out of options. There is another powerful tool in Chapter 13 called lien stripping. This can help if you have a second mortgage, a third mortgage, or a home equity line of credit (HELOC).

Lien stripping is possible when the value of your home is less than the balance of your first mortgage. In this situation, any junior liens like a second mortgage are considered “wholly unsecured” by the bankruptcy court. The law views them as having no equity to secure them.

Let’s use an example to make this clearer. Suppose your home is worth $400,000, and you are trying to handle the debt owed. You have a first mortgage with a balance of $425,000 and a second mortgage with a balance of $60,000.

Since the first mortgage is more than the home’s total value, the second mortgage is completely unsecured. In a Chapter 13 case, you could file a motion to strip this $60,000 lien. If the court agrees, the debt is reclassified as unsecured and may be discharged at the end of your case, freeing your home from that lien forever.

Cramdown in Business Bankruptcy: Chapter 11 Rules

The concept of a cramdown also exists in business bankruptcy, specifically Chapter 11, but it works differently. Chapter 11 is used by businesses and some individuals with debts too large for Chapter 13. A key part of a Chapter 11 is the reorganization plan, which must be approved by creditors or forced upon them through a cramdown.

For a plan to be confirmed over the objection of a class of creditors, the bankruptcy court must find that the plan does not discriminate unfairly and is “fair and equitable.” This brings the absolute priority rule into play. This rule is a fundamental principle of bankruptcy law that dictates the order of payment among different creditor classes.

Under the absolute priority rule, a senior class of creditors must be paid in full before any junior class can receive anything. The hierarchy is clear: secured creditors have the highest priority, followed by unsecured creditors, and finally, equity holders (the business owners). You cannot propose a plan that pays unsecured creditors 50 cents on the dollar while the equity holder gets to keep their ownership stake unless that class of unsecured creditors agrees to it.

However, there is a significant exception known as the “new value” contribution. The absolute priority rule can be overcome if the existing equity holders contribute new, substantial, and necessary capital to the reorganized debtor. This “new value” gives them the right to retain ownership in the business after the bankruptcy proceedings, as they are essentially “buying” the company back.

The Steps to Requesting a Cramdown

A cramdown does not happen automatically when you start your bankruptcy proceedings. You must actively request it as part of your case, and working with an experienced bankruptcy lawyer is critical for success. The process involves several steps that must be followed correctly.

1. File for Bankruptcy. The cramdown is available in Chapter 13 and Chapter 11 bankruptcy reorganization cases, which involve a repayment plan. It is not an option in a Chapter 7 liquidation bankruptcy. Many people are led to personal bankruptcy because of unmanageable debts from medical bills, credit card debt, or even liabilities from a past business formation.
2. Propose Your Chapter 13 Plan. Your proposed plan must clearly state your intention to cram down a specific debt. You will need to provide clear details on the property, your opinion of its value, and the new proposed secured loan amount. The plan must be submitted in good faith and be feasible.
3. Establish the Property’s Value. This is the most critical part and often where disputes arise. You will need to prove the property’s fair market value, which typically requires a professional appraisal. The value must be what the property is worth at the time of the filing.
4. Address Creditor Objections. The secured creditor has the right to object to your proposed plan and your valuation. They might present their own appraisal suggesting the secured property is worth more. Handling these objections requires knowledge of bankruptcy law and procedure.
5. Attend a Valuation Hearing. If you and the creditor cannot agree on a value, the court finds a resolution. The judge will decide the matter at a valuation hearing where both sides present evidence. This is a formal hearing where your bankruptcy lawyer argues your position before the bankruptcy court.
6. Get Plan Confirmation and Make Payments. Once the value is set and the plan is considered fair, the court will confirm it. You must then begin making your loan pay ments under the plan. Completing the entire three-to-five-year plan is necessary to get the full benefit; if you fail, the original lien could be reinstated.

Here’s a simple table to show which assets are generally eligible for a cramdown.

Property Type	Can You Use a Cramdown?	Important Notes
Primary Residence	No	You cannot reduce the main mortgage. But lien stripping of junior mortgages might be an option.
Cars & Personal Vehicles	Yes	The 910-day rule applies. You must have owned it for more than 910 days to qualify.
Rental or Investment Property	Yes	Mortgages on non-primary residences can be crammed down to the property’s fair market value.
Other Personal Property	Yes	This includes items like boats, furniture, or equipment bought with financing. A one-year rule often applies.

Seeing it all laid out like that can help clarify your options and show where a plan is acceptable. Sometimes, financial distress comes from many places, including judgments from personal injury cases or obligations from family law matters, and bankruptcy can help manage these unsecured debts. Finding the right legal help through a local lawyer directory is a key first step. When looking at a bankruptcy lawyer’s site, you will see they have a privacy policy to protect your confidential information.

Conclusion

Facing overwhelming debt is one of life’s most challenging experiences. A Chapter 13 bankruptcy cramdown can be a game changer, but it is a very specific tool for specific situations. It provides a real path to reducing what you owe on certain assets, like cars and investment properties, which can make your repayment plan successful.

Although you cannot use it on your primary home’s mortgage, you may still have great options like lien stripping a second mortgage. For businesses, a Chapter 11 cramdown, guided by the absolute priority rule, can allow a company to survive and become a successful reorganized debtor. Knowing about a bankruptcy cramdown is the first step toward regaining control of your finances and starting fresh.

Have questions about Chapter 13 bankruptcy? Contact The Law Office of William Waldner at 212-244-2882 to schedule your free consultation.