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What is a cramdown in a Chapter 11 bankruptcy?

There are many aspects of a Chapter 11 bankruptcy that might create confusion for Texas residents who are considering it as an option. Certain terms might be unfamiliar, but are important to understand when moving forward with a reorganization under Chapter 11. These can provide unexpected benefit if the Chapter 11 goes through. One particular aspect of a Chapter 11 that can be useful is known as a "cramdown."

If certain creditors are objecting to the Chapter 11 proceeding, a cramdown will let the bankruptcy court make modifications to the terms of the loan to try and benefit everyone involved in ways that would not be available if these modifications were not made. With a cramdown in a Chapter 11, there is a renegotiation rather than a simple loss of any restitution as would be the case in other bankruptcies. Creditors who have issued secured debt are usually in a better position with a cramdown that those who are awaiting repayment for debt that is unsecured.

The goal of a cramdown is to create a fair and equitable plan that can help all parties. The debtor must be deemed able to meet the obligations in the new plan for the modifications to be put in place. While the creditor might consider the terms imposed by the court in a cramdown to be unfavorable, it is generally done in instances where the alternatives available are worse. For example, a bondholder can receive equity in a company in lieu of other forms of repayment. It might not be ideal, but it can be viewed by all sides as better than getting nothing as they would with other parts of bankruptcy law.

Those who are confronted with business issues that have led to the need to consider filing for Chapter 11 bankruptcy should be aware of the various options available to them. Some, like a cramdown, can be highly beneficial to getting back on a stronger financial foundation. Discussing all available possibilities with a legal professional is the first step toward making a decision on which bankruptcy option is preferable.

Source: investopedia.com, "Cramdown," accessed on Oct. 26, 2015

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