What’s a Cramdown?

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Cramdown is a slang term referring to the discretionary powers that a bankruptcy court may employ when a company attempts to file a reorganization plan. Essentially, reductions are situations in which the court chooses to confirm or amend a plan of reorganization, even if some of the creditors involved have strong objections to the final draft of the plan. A restraint may be used when the court determines that the company seeking bankruptcy protection is making a sincere effort to do the best it can to recover from a financial setback and continue operating.

While cramdown is not an uncommon phenomenon, most courts choose to use this ability sparingly. Often the court will have detailed explanations from creditors as to why a given plan is not acceptable to one or more of the classes of creditors. At the same time, the court will hear from the company seeking bankruptcy protection, in an attempt to determine all the factors relevant to the reorganization. In general, the court will seek to mediate the situation so that the company and creditors can support the plan. However, if this is not possible, the court may choose to initiate a crackdown and resolve the issue.

The restriction may be in favor of the plan presented by the company, or an alternative plan presented by a class of creditors. It is also possible that the court may determine that a third reorganization plan encompassing elements of previously filed plans may be in order. Ultimately, the court will try to approve the plan that is best for all concerned.

Once the court issues a suppression, the reorganization plan is approved and bankruptcy proceedings will proceed. In the event the company fails to comply with the terms outlined in the approved plan, the court may also take additional steps that will help protect creditors’ rights even though the company has entered into default.

Smart Asset.

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