What Is Cram Down In Bankruptcy

Special Issues Involving Investment Property Mortgages

Finally, you should be aware that cramming down an investment property mortgage may pose certain problems. The idea behind cramming down a loan is that it will be paid off within the length of your Chapter 13 repayment plan, which is three to five years. In many situations, a debtor will not be able to pay off even the crammed down version of a mortgage on investment property within three to five years. This usually results in a balloon payment at the end of the plan, which someone facing financial difficulties may not be able to handle. As a result, many debtors opt against cramming down a mortgage on investment property.

Modern Law And Debt Restructuring

The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities, but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of the business.

For private households, some argue that it is insufficient to merely dismiss debts after a certain period. It is important to assess the underlying problems and to minimize the risk of financial distress to re-occur. It has been stressed that debt advice, a supervised rehabilitation period, financial education and social help to find sources of income and to improve the management of household expenditures must be equally provided during this period of rehabilitation . In most EU Member States, debt discharge is conditioned by a partial payment obligation and by a number of requirements concerning the debtor’s behavior. In the United States , discharge is conditioned to a lesser extent. The spectrum is broad in the EU, with the UK coming closest to the US system . The Other Member States do not provide the option of a debt discharge. Spain, for example, passed a bankruptcy law in 2003 which provides for debt settlement plans that can result in a reduction of the debt or an extension of the payment period of maximally five years , but it does not foresee debt discharge.

Answers About The Cram

Weintraub & Selth, APCs bankruptcy lawyers explain the Chapter 11 cram-down provision and provide clear answers to your business bankruptcy questions. While the following provides an overview of the cram-down provision and the business bankruptcy process, for more detailed answers and a candid conversation with a highly experienced Los Angeles business bankruptcy lawyer, call.

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Chapter 13 Vehicle Cramdown

This rule requires you must have purchased the vehicle and taken out the loan at least 910 days before filing the bankruptcy. So you cannot use a cramdown on a car you recently bought. An exception exists if you purchased the vehicle for your business.

Learn more about the 910-day rule in bankruptcy.

Cramdown For Real Property

Weâve talked about loans for vehicles, but what about real estate? Unfortunately, first mortgages on your primary residence are not eligible for a Chapter 13 cramdown, even if youâre upside down on your mortgage. If you owe more on your primary home than it is actually worth, you canât reduce the outstanding balance to fair market value in a Chapter 13 repayment plan.

If, however, you have an unsecured second mortgage on your primary residence, you may be able to strip that lien completely.

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Understanding Cramdown In Bankruptcy

Driving The Wedge Deeper: Fifth And Ninth Circuits Unite In Refusing To Condemn Artificial Impairment In Cramdown Chapter 11 Plans

One of the prerequisites to confirmation of a cramdown chapter 11 plan is that at least one impaired class of creditors must vote in favor of the plan. This requirement reflects the basic principle that a plan may not be imposed on a dissident body of stakeholders of which no class has given approval. However, it is sometimes an invitation to creative machinations designed to muster the requisite votes for confirmation of the plan.

Strategic classification can entail, among other things, separately classifying similar, but arguably distinct, kinds of claims in an effort to create an accepting impaired class or to prevent a dissenting creditor from dominating a class because its claim is so substantial that the creditor can block the classs approval of a plan. This controversial practice, which most commonly arises in a single-asset real estate case involving an undersecured creditor holding a substantial deficiency claim, is sometimes referred to as class gerrymandering and has been held to be invalid by many courts, including the Fifth Circuit in Phoenix Mut. Life Ins. Co. v. Greystone III Joint Venture , 995 F.2d 1274 , and the Fourth Circuit in Travellers Ins. Co. v. Bryson Props., XVIII , 961 F.2d 496 .

Voting and Plan Confirmation in Chapter 11

Cramdown Requirements

A plan discriminates unfairly if it treats a dissenting class of creditors less favorably than other classes of creditors that are similarly situated in terms of their legal rights to payment.

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Reasons To Cram Down A Loan

Using a cramdown can reduce the monthly payment that you make on a loan by extending payments over a longer period. The payment period may last throughout the duration of a Chapter 13 bankruptcy, which will be three to five years. The bankruptcy court also may intervene to lower the interest rate on the loan. Once you pay off the loan, you will own the asset free and clear.

Assume that you still have $20,000 to pay in the balance of your loan, but your car is only worth $12,000. The secured part of the loan can be reduced to $12,000, and the remaining $8,000 would be reclassified as non-priority unsecured debt. These types of debts may never be paid off in a Chapter 13 bankruptcy, or they may be paid off only in part. Either way, you will not need to worry about the unsecured portion of the debt after your bankruptcy is complete, assuming that you have kept up with payments under the repayment plan and paid off the other $12,000.

Understanding Cramdowns In Massachusetts

A cram down is a court-ordered reduction in the principal or interest rate of property that is secured by a loan. It can also include other required changes in mortgage loan terms and conditions. Typically this will mean reducing your home mortgage loan, car loan, investment property mortgages, equipment loans and other secured business debt. I Cram downs typically occur in a Chapter 11, Chapter 12 orChapter 13, many times over the objections of the creditor.

Cram down has also come to mean any situation in which a creditor is forced to accept a financial arrangement that is not to their benefit. There are also ways to cram down an auto loan during a bankruptcy, such as requesting the court in aChapter 7 to value the vehicle and allow the debtor to pay off the loan at fair market value instead of the original loan amount. There are financing companies and banks that offer specialized auto loans to allow you to redeem your car in bankruptcy. If you are consideringbankruptcy, a Worcester cram down lawyer should be consulted to discuss all of your concerns and answer any questions you have. Understanding the many technical aspects of bankruptcy will give you assurance that you are making the best choice possible regarding your financial condition.

Contact a Worcester lawyerfor legal counsel and representation if you are experiencing debt overload.

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Second Circuit Adopts Secured Creditor Cramdown Standard Based On Market Efficiency

In 2017, the U.S. Court of Appeals for the Second Circuit held in In re MPM Silicones, LLC that the appropriate interest rate for replacement notes issued to secured creditors under a cramdown Chapter 11 plan must be a market rate if an efficient market exists. If no such market exists, however, the formula rate must be applied. While the decision settled the question concerning the applicable cramdown interest rate methodology in the Second Circuit, it left unresolved a critical element of that methodology: What constitutes an efficient market?

A close reading of In re MPM and the precedent upon which it relied reveals that a practical, transaction-based approach should be used in assessing market efficiency rather than an economic theory approach .

What Is A Cramdown

A cramdown is the imposition of a bankruptcy reorganization plan by a court despite any objections by certain classes of . A cramdown is often utilized as a part of the Chapter 13 bankruptcy filing and involves the debtor changing the terms of a contract with a creditor with the help of the court. This provision reduces the amount owed to the creditor to reflect the fair market value of the collateral that was used to secure the original debt.

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Common Issues Affecting Vehicle Cramdown

Discussed below are situations that might affect your ability to cramdown your motor vehicle:

• Non-filing Co-Debtors- It is not possible to cram down your car loan if you’ve a co-debtor who isn’t in bankruptcy. Usually, this happens when a couple obtains a debt together, and one partner files a Chapter 13 case. In this scenario, the lender might oppose the auto loan cramdown or seek repossession or compensation once the bankruptcy case is over. Bearing that in mind, sometimes it is possible to get a lender’s agreement to the auto cramdown if your alternative is a Chapter 7 case for all borrowers.
• Cross-Collateralized Car Loans- A cramdown could be instrumental in handling cross-collateralization provisions, especially in a credit union loan. In a car loan, cross-collateralization permits the credit union to use the car as collateral for your subsequent debt issued by the credit union.

Is A Hotel A Single Asset Real Estate Case

On April 20, 2021, the United States Bankruptcy Court for the Middle District of Florida, Orlando Division ruled that hotels generally, and this hotel in particular, do not constitute single asset real estate projects,and, as such, the debtor in the case was eligible to file and proceed with the Subchapter

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Lenders Must Prepare For Real Estate Bankruptcy Cramdowns

• New York

The unprecedented disruption in the real estate markets caused by COVID-19 has lenders thinking again about possible bankruptcy filings by their borrowers. Loans secured directly or indirectly by lodging, retail, gaming and retail assets are under particular distress.

During the real estate downturn in the early 1990s, real estate owners and operators often filed for bankruptcy protection as a negotiating tactic and as a means of shielding their assets from foreclosure. These cases, which often dragged on for years at enormous expense, often had the desired impact of altering the negotiating leverage with lenders.

The COVID-19 crisis is arguably much worse than the financial crisis of 2008-2009, and poses a much different set of risk factors and solutions for real estate investors and lenders. The stay-at-home order has shuttered almost every industry that utilizes real estate to conduct their businesses. In prior downturns, the real estate investors and lenders relied on the then certainty of continued tenant occupancy and rent payments and, in the case of hotels, inherent demand drivers, even if capitalization rates expanded as a result of a shrinking economy, scarcity of financing options and/or a financial crisis.

During the pendency of the financial crisis of 2008-2009, the number of real estate bankruptcy filings was limited. The reason for this was twofold.

First Steps

What Is A Chapter 13 Bankruptcy Cramdown

When your home or primary vehicle is at risk, you can take advantage of Chapter 13 bankruptcy cramdowns to help improve your situation. Utilizing a cramdown can be beneficial because it will reduce the balance of a debt down to the value of the property at risk. It may be possible for you to also increase the length of your payment plan, lower your interest rate and decrease your monthly payment. When you file for bankruptcy, the court will determine the interest rate you owe.

When you default on a secured debt, creditors have legal avenues of repossession or foreclosing on your property. Mortgages and car loans are both examples of secured debts, but filing for Chapter 13 bankruptcy can help you maintain ownership of your property. Cramming down your loan means that the amount you owe is lowered to the value of the at-risk property. The debt included in your Chapter 13 payment plan will reflect this lowered amount or cramdown. The remaining balance of your loan will frequently be lumped with unsecured debts. Often, the remaining balance will be discharged upon the completion of your plan.

Certain restrictions apply to the types of loans you can cramdown. Congress restricts individuals from cramming down any car loans for at least 910 days. This 2 ½ year period ensures that people dont attempt to immediately cram down their loans immediately after purchasing a new car. A one-year rule is typically imposed on other types of personal property loans.

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Limitation On Personal Residence

There is a limitation to cram-down on personal residences. Section 1322 does not permit cram-down on a personal residence, unless the debt is wholly unsecured. In a practical sense, this means that only second mortgages are subject to chapter 13 cram-down and only when the amount owed on the first mortgage is equal to or more than the propertys value.

Changes To Hope For Homeowners

The Act includes modifications to the Hope for Homeowners Program that are intended to encourage borrowers to participate by reducing fees and servicers to engage in modifications by providing incentives. Among other changes, the Act:

• reduces the initial up-front insurance premium payable by the borrower from 3% to 2% or less
• reduces the annual insurance premium payment payable by the borrower from 1.5% to 1% or less
• allows FHA to pay $1,000 per loan to servicers of loans that are successfully refinanced into the FHA program
• allows FHA to share, upon sale of the mortgaged property, up to 50% of any price appreciation with the borrower, up to the appraised value of the mortgaged property at the time the mortgage being refinanced was made
• allows FHA to share its 50% of price appreciation with the mortgage holder to induce loan writedowns
• imposes a ban on millionaires, which prohibits borrowers with a net worth exceeding $1 million from participating in the program and
• eliminates and softens certain of the certifications required to be provided by borrowers.

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Requirements For Executing A Cram Down

The court does allow the bankruptcy judge to allow a cram-down. However, this provision is only there to deal with unreasonable creditors. It is still the responsibility of the bankruptcy court to ensure that the dissenting class of creditors get their fair share regardless of their unreasonable stand.

This is the reason why the law mandates that certain conditions be fulfilled before the execution of a cram down is legally allowed.

From the above conditions, it is fair to assume that the cram down provisions are only present to bargain with unreasonable creditors. The requirements for the execution of a cram down ensure that the debtor cannot use the cram down provisions as long as the creditors are being reasonable and are willing to negotiate.

Reasons Creditors May Object To A Reorganization Plan

Because some creditors may not agree to your plan, it is best to anticipate their reasoning before you make a proposal. Our Los Angeles business bankruptcy lawyers can assist you during this process and throughout all the steps of bankruptcy. We are extremely experienced at anticipating a creditors reasoning for objecting to a bankruptcy plan.

• Claiming the debtor does not meet Chapter 11 requirements
• Disputing the valuation of collateral
• Demonstrating the plan is not feasible
• Demonstrating the plan was not in good faith

If one or more class of creditors refuse to accept the proposed plan, the debtor may attempt to override their objections by requesting the court to use the cram-down provision of the bankruptcy code. If the bankruptcy court requires the creditors to comply with the proposed plan despite their objections, this action is referred to as a cram down. Our Los Angeles business bankruptcy lawyers can be your guides and your advocates throughout the process.

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Example Of Cram Down/strip Down

To illustrate the operation of the various aspects of Cram Down, let us suppose that:

In Chapter 13, a Debtor can:

For the sake of this example, lets assume that the Till interest rate would be 8.5%.

This can result in a tremendous savings to a Debtor, and by effectively allowing you to refinance your car loan, you may be able to free up your cash flow and dramatically improve your financial position.