What is a cramdown?
A cramdown is a Chapter 13 bankruptcy provision that allows a debtor to reduce a secured debt (typically a second mortgage or junior lien) to the current fair market value of the collateral property.
Under Chapter 13 bankruptcy, a cramdown lets a debtor reduce certain secured debts down to what the property is actually worth at the time of filing. If you owe $80,000 on a second mortgage but the house is only worth $120,000 total (with a first mortgage of $100,000), a cramdown would allow the second lien holder to receive payment only on that $20,000 equity rather than the full $80,000 debt. The unsecured portion is treated as a general unsecured claim in the reorganization plan.
Cramdowns apply most often to junior liens, vehicle loans, and personal property liens. They do not apply to the primary residence mortgage (the first lien), which cannot be crammed down even if the home is underwater. This protection for primary mortgages was built into bankruptcy law to preserve the integrity of home loans. The mechanism is named for the debtor's ability to force creditors to accept reduced payment through the court-approved repayment plan.
The benefit of a cramdown depends on your property's current value and the amount of equity available. If your home has dropped significantly in value since you borrowed against it, working with an attorney experienced in Chapter 13 cases can help determine whether a cramdown makes sense for your situation. An attorney can evaluate your specific liens and property value to explain how this tool might apply to Chapter 13 proceedings in your case.