Over 100 Years Of Collective Experience

Cramdown in a Chapter 13 proceeding

On Behalf of | Sep 29, 2022 | Bankruptcy |

When a person in Virginia is going through Chapter 13 bankruptcy, a cramdown may be part of the process. This is an externally imposed bankruptcy plan that does not have the support of all creditors.

Bankruptcy

A person that goes through Chapter 13 bankruptcy is trying to reorganize their debts in an attempt to return to viability. The creditors of the person have a stake in that process because they will be entitled to a share of the proceeds from the bankruptcy. Senior and secured creditors are first in line to be paid back, so normally they have to agree to the bankruptcy plan. However, in a cramdown, the bankruptcy judge will impose a bankruptcy structure without senior creditors’ approval.

Why cramdowns happen

When senior creditors seem to be pushing for too much in their proposed plans, the judge may decide to choose a different plan. The law entitles them to consider fairness and equity when determining a plan, so they are not required to maximize the interests of the creditors. The cramdown empowers the judge to take over if the creditors are too aggressive, providing protection for the person declaring Chapter 13 so they are not at the mercy of their creditors. This is especially important because under Chapter 13 bankruptcy, saving the home from being taken by creditors is a strong possibility.

Chapter 13 cramdowns are a way for judges to ignore the desires of creditors during bankruptcy if those creditors ask for too much. Bankruptcy settlements are required to be fair and equitable, not just a way to transfer wealth over to the creditors.

Archives