What Is a Cram Down in Bankruptcy? Valuation, Rate, and Approval

A cram down in bankruptcy is a court order that forces a secured creditor to accept reduced loan terms: the secured debt gets cut down to whatever the collateral is currently worth, any balance above that becomes unsecured, and the court sets a new interest rate and payment schedule for what remains. It is available in Chapter 11, Chapter 12, and Chapter 13 cases, and it works over the creditor’s objection. The catch is that several categories of debt are off-limits, the valuation and interest-rate rules are specific, and the whole thing unwinds if you don’t finish the plan.

How the Split Works

Federal bankruptcy law says a creditor’s secured claim only extends as far as the value of the collateral. Anything owed above that value is treated as unsecured.¹ A cram down applies that rule inside your reorganization plan.

Say you owe $20,000 on a car loan, but the car is worth $12,000 today. The court reduces the secured portion of the debt to $12,000, which you repay with interest through the plan. The remaining $8,000 drops into the pool of general unsecured claims, where it typically gets paid at a fraction of face value or not at all, depending on what your plan provides for unsecured creditors.

On the secured portion, the court sets new repayment terms. Lower principal, often a different interest rate than your original contract, and a payment amount built into your plan. The combination usually produces a much smaller monthly payment than you had going in.

What Debts You Can Cram Down

Cram downs target secured debts where the collateral has fallen below the loan balance. The common candidates:

Vehicle loans on cars and trucks bought more than 910 days (roughly two and a half years) before filing.
Mortgages on investment property, rentals, and vacation homes — anything that isn’t your primary residence.
Business equipment, machinery, tools, computers, and inventory.
Household goods and furniture securing a loan incurred more than one year before filing.²

Chapter 12, which covers family farmers and fishermen, reaches further. It allows cram downs on farm equipment, agricultural land, and even the family home. Chapter 12 has no statutory bar against modifying a primary residence mortgage, which makes it an unusually powerful tool for debtors who qualify.³

What You Cannot Cram Down

Your Principal Residence in Chapter 13

A Chapter 13 plan cannot modify a mortgage secured only by the debtor’s principal residence.⁴ You can cure arrears over the three to five years of the plan, but the principal, interest rate, and monthly payment on the first mortgage stay as they are. This is one of the sharpest limits in consumer bankruptcy.

There is an exception for a completely underwater junior lien. If the first mortgage balance exceeds the home’s value, a second mortgage or home equity loan has no collateral behind it. Many courts allow the debtor to “strip off” that junior lien and treat the whole thing as unsecured. Technically that is a lien strip, not a cram down, but the practical result is similar: once you complete the plan, the second mortgage is gone.

Recent Purchase-Money Loans

Under the “hanging paragraph” added to the confirmation statute in 2005, you cannot cram down a vehicle loan if you bought the car for personal use within 910 days of filing.² For other personal property, the cutoff is one year. Furniture bought on credit eleven months before filing is still fully secured for cramdown purposes.

These time bars only apply when the lender holds a purchase-money security interest — the loan was used to buy the collateral itself. A title loan on a car you already owned, or a loan secured by property you didn’t purchase with those loan proceeds, generally stays eligible regardless of timing.

How the Court Values Your Collateral

The valuation drives the whole deal, because whatever number the court lands on becomes your new secured debt. For personal property like vehicles and household goods, the standard is replacement value: what a buyer in your situation would pay for comparable property, given its age and condition.¹

Replacement value is not full retail. It strips out costs a dealer builds into the sticker price but that you don’t actually receive by keeping the property, like warranties, reconditioning, and inventory storage. For real property, courts look at fair market value and generally rely on a professional appraisal. A home appraisal for a cramdown motion typically runs a few hundred dollars for a single-family home and more for multi-unit or complex properties. That cost is out of pocket, on top of attorney’s fees, so build it into your budget before filing.

The Interest Rate the Court Will Set

Reducing the principal is only half the picture. The court also assigns an interest rate to the crammed-down secured debt. In Till v. SCS Credit Corp., the Supreme Court held that courts should start with the national prime rate and add 1% to 3% to account for the risk that the debtor won’t complete the plan. Practitioners call this the Till rate, or the formula rate.

As of early 2026, the national prime rate is 6.75%.⁵ With a typical risk adjustment of 1.5% to 2%, most cramdown rates in 2026 cases land somewhere around 8% to 9%. That is usually well below the original contract rate on a subprime auto loan or high-interest equipment loan, which is a large part of why cram downs are worth pursuing. Some districts publish standing orders setting a presumptive Till rate, so the exact figure varies by where you file.

What the Court Must Find to Approve It

A cramdown isn’t automatic. The court has to confirm the plan, and confirmation requires several findings. Miss any one of them and the plan fails.

Present Value

The plan must give the secured creditor payments whose present value, as of the plan’s effective date, equals at least the allowed secured claim.⁶ That is why the court assigns an interest rate rather than letting you repay the reduced principal with no interest at all. The creditor also keeps its lien on the collateral until the debt is paid or you receive a discharge.

Best Interests of Creditors

Every objecting creditor must receive at least as much under the plan as they would in a hypothetical Chapter 7 liquidation.⁷ In most consumer cases this test is easy to meet, because unsecured creditors would get little or nothing in a liquidation. In cases with significant nonexempt assets, the plan payments have to at least match what a Chapter 7 trustee would distribute.

Feasibility

You have to convince the court you can actually make the payments. Chapter 13 requires a finding that the debtor “will be able to make all payments under the plan.”² Chapter 11 requires a finding that confirmation is not likely to be followed by liquidation or further reorganization.⁶ This is where many cramdown proposals break down. The budget pencils out on paper, but the court sees no cushion for emergencies or income swings.

No Unfair Discrimination

In Chapter 11, the plan can’t unfairly discriminate between classes of creditors with similar priority.⁶ You can’t pay one class of unsecured creditors 50 cents on the dollar while paying another class with the same priority 10 cents without a legitimate reason.

If the Plan Fails, the Cram Down Unwinds

A cram down only sticks if you finish the plan. If your Chapter 13 case gets dismissed before you complete payments, the law effectively rewinds the clock. Liens that were voided or modified during the case are reinstated, and property revests in whoever held it before the bankruptcy began.⁸ The creditor’s original lien comes back at its original amount, minus whatever you paid during the case. You do not get a refund of plan payments.

This is a real risk. Chapter 13 plans run three to five years, and job loss, medical emergencies, and divorce derail plenty of budgets. If you crammed down a $20,000 car loan to $12,000 and your case is dismissed after you’ve paid $6,000, the creditor can pursue the balance of the original $20,000 debt minus those payments. The savings disappear.

Tax Side

Outside bankruptcy, forgiven debt is usually taxable income. Cancel $8,000 of a car loan and the IRS treats that $8,000 as money you earned. Bankruptcy is the exception: federal tax law excludes discharged debt from gross income when the discharge occurs in a bankruptcy case.⁹

The trade-off is that the excluded amount may reduce certain tax attributes you carry forward, like net operating losses or tax credit carryovers. You report the exclusion on Form 982.¹⁰ For most individual Chapter 13 debtors, the attribute reduction is minor compared to the tax bill avoided. If you are reorganizing a business through Chapter 11 and carrying significant tax losses forward, talk to a tax professional before finalizing a plan that includes cram downs.

1
Office of the Law Revision Counsel. 11 U.S. Code 506 – Determination of Secured Status
2
Office of the Law Revision Counsel. 11 U.S.C. 1325 – Confirmation of Plan
3
Office of the Law Revision Counsel. 11 U.S. Code 1225 – Confirmation of Plan
4
Office of the Law Revision Counsel. 11 U.S.C. 1322 – Contents of Plan
5
Federal Reserve Bank of St. Louis. Bank Prime Loan Rate (DPRIME)
6
Office of the Law Revision Counsel. 11 U.S.C. 1129 – Confirmation of Plan
7
Office of the Law Revision Counsel. 11 U.S.C. Chapter 11 – Reorganization
8
Office of the Law Revision Counsel. 11 U.S.C. 349 – Effect of Dismissal
9
Office of the Law Revision Counsel. 26 U.S. Code 108 – Income From Discharge of Indebtedness
10
Internal Revenue Service. About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)