In certain bankruptcy cases, a debtor can propose a plan that does not pay a secured creditor the full amount of the outstanding debt, paying only what the collateral is currently worth instead. This is called a “cram-down,” and for creditors holding collateral that has dropped in value, it ranks among the most serious threats a bankruptcy plan can pose.
How Cram-Down Works
The mechanics are straightforward. The Bankruptcy Code allows the court to treat your secured claim as being worth only as much as the collateral securing it. If you are owed $400,000 on a loan but the property securing it is only worth $280,000 today, a cram-down plan can propose to treat only $280,000 as your secured claim, pay that amount over the plan term with interest, and treat the remaining $120,000 as an unsecured claim that may receive little or nothing.
Your lien does not disappear, but the plan effectively reduces the amount you will be paid based on current market value rather than the amount the debtor promised to repay.
When Cram-Down Is Allowed
Cram-down can happen in Chapter 13 and Chapter 11.
In Chapter 13, cram-down is available for most secured claims, with one major exception. A debtor cannot cram down a mortgage on their primary residence. The Bankruptcy Code specifically protects home mortgage lenders from having their claims modified in a Chapter 13 plan. If your loan is secured by the debtor’s principal residence and nothing else, cram-down does not apply to you.
This protection does not extend to investment property, commercial real estate, vacation homes, or any property that is not the debtor’s primary residence. For those, cram-down is available to the debtor if the plan meets the required standards.
In Chapter 11, cram-down can apply to virtually any secured claim, though the confirmation standards are more demanding. One limit carries over: Section 1123(b)(5) contains the same protection for a claim secured only by an individual debtor’s principal residence that Chapter 13 provides, so a homestead mortgage is not freely modifiable in an individual Chapter 11 either.
What We Fight Over
When a debtor proposes to cram down a secured claim, two issues almost always become contested.
The value of the collateral. The lower the debtor values the property, the smaller your secured claim. We push back on low valuations with our own appraisals and expert testimony when necessary. Pinning down an accurate value is central to what we do in a contested cram-down situation.
The interest rate. When a secured claim is crammed down, the plan must pay the present value of the claim, which means it must include an appropriate rate of interest over the payment period. Debtors often propose interest rates that are too low. We insist on a rate that reflects the actual risk of this particular loan with this particular debtor.
What to Do If a Plan Proposes to Cram Down Your Claim
If you receive notice of a Chapter 13 or Chapter 11 plan that proposes to reduce your secured claim, you have a limited window to object to plan confirmation. Once the plan is confirmed by the court, it binds all creditors, including those who might have objected but did not.
Contact us when you receive the plan. We will review the proposed treatment of your claim and advise you whether to object and on what grounds. You cannot afford to miss the objection deadline.
In this section: Bankrupt Debtors · Plan Negotiation
Frequently Asked Questions
How is the value of the collateral determined in a cramdown fight?
Value is determined by the bankruptcy court based on the evidence presented. Both the debtor and the creditor typically submit appraisals or other evidence of value. The court evaluates the credibility of each party's evidence and makes a finding. Because valuation is the central issue in most cramdown disputes, the quality of the appraisal and the credibility of the appraiser carry real weight. We engage qualified appraisers with strong credibility in bankruptcy proceedings when this issue is contested.
What interest rate does the debtor have to pay on a crammed-down claim?
The plan must pay the present value of the secured claim, meaning it must include an interest rate sufficient to compensate the creditor for the time value of money over the plan term. Courts have established a formula based on the prime rate plus a risk adjustment. The risk adjustment varies based on the specific debtor's financial condition and the quality of the collateral. Debtors routinely propose the minimum possible rate; we push back with evidence supporting a higher rate.
Can cramdown happen to a second mortgage on the debtor's home?
Generally no. The home mortgage protection rule extends to claims secured only by the debtor's primary residence, which includes second mortgages and home equity lines of credit on the same property. All of those claims are protected from modification in a Chapter 13 plan. The protection applies to the property, not just to the first mortgage.
What if the property's value is higher than the debt, can there still be a cramdown?
No. If the property's value equals or exceeds the outstanding debt, the entire claim is fully secured and there is nothing to cram down. The plan must pay the full claim. Cramdown only comes into play when the collateral is worth less than the debt, when the loan is "underwater."
What happens to my lien when my claim is crammed down?
Your lien does not disappear. A cramdown reduces the amount the plan will pay you based on the current value of the collateral rather than the amount the debtor promised to repay, but it does not strip the lien itself. If you are owed $400,000 on a loan and the property is worth $280,000 today, the plan can treat $280,000 as your secured claim, pay that amount over the plan term with interest, and treat the remaining $120,000 as an unsecured claim that may receive little or nothing.
Does cramdown apply in Chapter 11 the same way it applies in Chapter 13?
Not exactly. In Chapter 13, cramdown is available for most secured claims, with the major exception of a mortgage secured only by the debtor's primary residence. In Chapter 11, cramdown can apply to virtually any secured claim, including home mortgages, but the confirmation standards a debtor must meet are more demanding. Which chapter your debtor is in changes both what is at risk and how we frame our objection.
My loan is secured only by the debtor's home. Am I safe from cramdown?
If your loan is secured by the debtor's principal residence and nothing else, cramdown does not apply to you in a Chapter 13 plan. The Bankruptcy Code specifically protects home mortgage lenders from having their claims modified in Chapter 13. That protection does not extend to investment property, commercial real estate, vacation homes, or any property that is not the debtor's primary residence, and it does not carry the same force in Chapter 11. We confirm what the loan is secured by before advising you on your exposure.
I just received a plan proposing to cram down my claim. How long do I have to respond?
You have a limited window to object to confirmation, and you cannot let it pass. Once the court confirms the plan, it binds all creditors, including those who could have objected but did not. Contact us as soon as you receive the plan. We will review the proposed treatment of your claim, advise you whether to object and on what grounds, and file the objection before the deadline.