Lien cramdown as used in Bankruptcy laws refer to the removal of a secured portion of a lien in cases where the present market value of the asset is not sufficient to secure the entire lien. Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. When the lien exceeds the value of the asset, that portion of the lien exceeding asset value is unsecured.
Lien cramdown is commonly applied in automobile loans. For example, if a person has $25,000 remaining balance to be paid off in a car loan. The present value of the car is $15,000. Lien stripping may be applied during bankruptcy proceedings such that the secured portion of your car loan is reduced to $15,000 and the remaining $10,000 of the loan is stripped of its secured status, to unsecured.
Lien cramdown is a valuable tool available in both chapter 13 and chapter 11 bankruptcy. However it does not apply when filing chapter 7 bankruptcy [Nobelman v. American Savs. Bank, 508 U.S. 324, 113 S.Ct. 2106 (1993)]. This is applicable to most of the liens except primary home mortgage provided all the requirements are met. Lien stripping is prevented only when the lien is secured “solely” by a personal residence. Court decisions have made it clear that when the debtor has given other collateral (in addition to the personal residence; e.g., office equipment) as security for the mortgage, lien stripping will be allowed. This is also termed as lien stripping.