Chapter 11 bankruptcy can be a highly complex process. That’s why it’s crucial to have experienced guidance throughout. Even the terminology used can seem like a foreign language.
Take the word “cramdown.” You won’t find it in the Bankruptcy Code, but it’s a common term in Chapter 11 bankruptcy nonetheless.
A cramdown is when a bankruptcy court changes the terms of a debt over the objections of the creditor to help the debtor more easily pay it off. The term is also used when investors, such as a venture capital firm, are required by the bankruptcy court to accept unfavorable terms. They are considered to be “crammed down” their throat, so to speak.
Cramdowns typically involve secured debts
Secured debts are, as the name implies, secured by some type of collateral, like the asset the business took on debt to purchase. A vehicle or piece of equipment would be two examples. Bankruptcy courts generally allow creditors only the current fair market value (FMV) of the collateral.
Note that mortgages on primary residences aren’t generally subject to cramdowns. This likely wouldn’t be applicable in a Chapter 11 bankruptcy case.
On an asset that depreciates quickly and considerably, like a vehicle, that FMV may be far less than what’s owed. Further, collateral subject to a cramdown typically must be at least a year old. In fact, the minimum time since the purchase of a vehicle is 910 days for the debt to be eligible for one.
With sound legal guidance, you can better determine whether Chapter 11 is the right choice for your business and, if it is, more successfully and efficiently navigate the process. This can help you be in the best position to move forward.