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Cramdowns may allow for the reduction of the lender's debts to the fair market value of the property. If a cramdown occurs it can mean unsecured creditors are paid little to nothing under a bankruptcy repayment plan or a secured creditor may not receive payments as quickly as they like, the interest charged to the debtor is lowered or the type of collateral is changed.

This can be easily understood with an example. If you purchase a car for $25,000 and could sell that car for $15,000 on the open market, the Bankruptcy Court may cramdown the total amount owed for the car to $15,000 or the market value for the car. The remaining $10,000 owed may be treated differently allowing the debtor to pay only a fraction of the debt associated with it. Cramdowns have been more common in the recent financial crisis. The bankruptcy courts have helped borrowers by altering their mortgage terms hoping to eliminate the need for a home foreclosure (over the objections of certain mortgage companies).

More Help on Cramdown

  • Bankruptcy Code - The United States constitution outlined in Article I, Section 8, gave the right of Congress to establish \"uniform laws on the subject of bankruptcies.\" - read more

  • Bankruptcy Court - United States federal courts have jurisdiction over all bankruptcy cases and the cases are not allowed to be filed in state court. - read more

  • Secured Creditor - Creditors are any person or entity that is owed a debt from a debtor before or on the date the debtor files for bankruptcy. - read more

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