Cramming Down a Loan
What does Cramming Down a Loan mean?
Cramming down a loan is an "unofficial legal term," but it is commonly used and practiced throughout the United States in many U.S. District Bankruptcy Courts. Cramming down a loan is the notion that a bankruptcy court has forced a secured creditor to accept the current value of a secured asset instead of the full amount owed. The amount "crammed down" is always lower than the loan principal. Historically, secured debt contracts were not impacted by bankruptcy, but after the financial crisis of 2007, United States bankruptcy courts have started to analyze the fair market value on certain secured debts for Chapter 11, 12, and 13 reorganization plans.
Within the last few years judges have taken a closer look at the principle loan amount for some contracts and have been more willing to discharge the amount of the principal of the loan which is above the fair market value. If a judge makes this decision the debtor filing Chapter 11, 12 or 13 may only have to pay back interest, penalties, and fees during the bankruptcy repayment plan. They would not have to repay the complete principal balance. As the country recovers financially the practice of cramming down a loan may become less common. It is not clear if the precedent which judges have set in the recent years will continue or not.