What is a Cramdown?

A cramdown is a debt repayment plan that a bankruptcy court forces a bankrupt entity's creditors to accept, typically over the objections of one or more classes of creditors (usually secured creditors). A cramdown usually involves the assistance of a bankruptcy court in allowing a debtor to alter the terms of a contract with a creditor.

This approach has been especially valuable for forcing secured lenders to accept a reorganization plan. The terms of this plan involve paying creditors less than the full amount that they are owed, on the grounds that this plan will pay creditors more than would be the case if the bankrupt entity were to liquidate instead. Cramdowns were originally used in Chapter 13 personal bankruptcies, and were later adopted for use in Chapter 11 bankruptcies. A key requirement of a cramdown is that the plan is equitable for all creditors who are owed funds.

The cramdown term is a contraction of the concept of cramming the repayment solution down the throats of creditors, thereby implying that there will be resistance to the plan.