Cram-down is a term used in bankruptcy law to refer to the Chapter 13 provision that allows debtors to retain collateral as long as they offer repayment of the “secured portion” or fair market value of the collateral in their repayment plan. For example, bankruptcy law permits a debtor to reduce his/her car payments if the replacement value of the vehicle is less than what the debtor owes to fully pay off the vehicle. The balance of the indebtedness that exceeds the fair market value of the collateral is considered to be unsecured and is placed at the lowest priority of payment.
The effects of the cram-down are reducing the amount of the secured claim to the value of the property at the time the bankruptcy plan is confirmed, providingthe debtor with more time to pay the loan, and reducing the value of interest to the prime rate. For example, a two (2) year loan of $8,000.00 at an interest rate of 16 percent may be reduced to a claim of $6,000.00 payable over a period of six (6) years at the prime interest rate. If the debtor decides he doesn’t want the car anymore, he can simply stop paying the trustee and abandon the plan. There is no penalty for a debtor who doesn’t live up to the terms of the bankruptcy plan.