cramdown
A bankruptcy court provision reducing the principal of a secured debt to the current market value of the collateral.
Example
“The Chapter 13 cramdown reduced the car loan balance from $18,000 to the car's current value of $9,000.”
Memory Tip
CRAMDOWN — reduce the loan to what the asset is actually worth. Powerful in Chapter 13.
Why It Matters
A cramdown can significantly reduce the amount you owe on a secured debt during bankruptcy, making it easier to keep valuable assets like your home or car. Understanding this option is crucial if you are facing bankruptcy because it could mean the difference between losing an asset and keeping it with a more manageable debt level.
Common Misconception
Many people believe that a cramdown applies to all types of debt, but it only works on secured debts where the collateral has declined in value. Home mortgages on primary residences are generally excluded from cramdowns, which surprises many homeowners dealing with underwater mortgages.
In Practice
Suppose you owe 30,000 dollars on a car loan but the vehicle is only worth 18,000 dollars in today market. Through a cramdown in bankruptcy court, your debt could be reduced to 18,000 dollars, eliminating the 12,000 dollar difference while allowing you to keep the car and pay off the reduced amount.
Etymology
Modern bankruptcy term — cramming the debt down to the actual value of the asset.
Common Misspellings
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