What Is a Cramdown in Bankruptcy? How It Works and What Qualifies

A cramdown in bankruptcy is a court order that forces a secured creditor to accept modified loan terms, typically a reduced principal balance matching the collateral’s current value plus a new interest rate, even when the creditor objects. It shows up most often in Chapter 13 and Chapter 11 cases and can be the difference between keeping an underwater asset and losing it.

How the Split Between Secured and Unsecured Works

Every cramdown begins with a valuation. Under federal bankruptcy law, a secured claim is only “secured” up to the value of the property backing it.¹ When the debt is larger than the collateral is worth, the court splits the claim into two pieces: a secured portion equal to the property’s market value, and an unsecured portion covering the leftover balance. That split is what makes cramdown possible.

The mechanics look like this. Say you owe $20,000 on a car loan and the car is now worth $12,000. The court treats $12,000 as the secured claim and reclassifies the remaining $8,000 as unsecured debt. You repay the $12,000 secured portion through your bankruptcy plan. The $8,000 unsecured piece joins your other unsecured debts and is paid at whatever percentage the plan provides, which in many Chapter 13 cases is only a fraction. Any unpaid balance is discharged when the plan ends.

For personal property in individual Chapter 13 or Chapter 7 cases, courts use “replacement value,” roughly what a retail seller would charge for similar property in the same condition.¹ Chapter 11 cases give courts more flexibility in choosing both the valuation method and the measuring date, depending on the debtor’s proposed use of the property.

The New Interest Rate

Cutting the principal is only half the picture. The court also resets the interest rate on the new secured balance. In Till v. SCS Credit Corp., the Supreme Court adopted a “formula approach,” sometimes called prime-plus: start with the national prime rate and add a risk adjustment reflecting the higher default risk that bankrupt borrowers carry.² Courts have generally approved risk adjustments between 1% and 3% above prime.

With the national prime rate at 6.75% in early 2026, a typical crammed-down rate lands somewhere between roughly 7.75% and 9.75%.³ The court weighs factors like the type of collateral, the length of the plan, and the debtor’s overall finances when picking the adjustment. The result is usually well below the original contract rate, particularly on subprime auto loans.

Which Debts Qualify

Not every secured debt can be crammed down. The Bankruptcy Code draws sharp lines based on the type of collateral, when the debt was incurred, and the chapter the debtor filed under.

Vehicle Loans

Car loans are the most common cramdown target, but only if you bought the vehicle more than 910 days (about two and a half years) before filing. This restriction, sometimes called the “hanging paragraph,” blocks debtors from financing a car and immediately reducing the loan to a lower value.⁴ For older loans, you can reduce the secured balance to the vehicle’s current value, apply the Till formula rate, and pay that amount through your plan.

Other Personal Property

Secured debts on non-vehicle personal property, such as furniture, electronics, or equipment bought on credit, follow a similar rule with a shorter window. Debt incurred within one year before filing is protected. Anything older can be crammed down to the collateral’s current value.⁴

Investment Property and Second Homes

Mortgages on rental property, investment property, and vacation homes can be crammed down to current market value in both Chapter 13 and Chapter 11. The primary-residence protection discussed below doesn’t reach these properties, so a debtor who is underwater on a rental can reduce the secured claim to what the property is actually worth.

What Cramdown Cannot Touch

The largest protection in the Bankruptcy Code shields lenders holding a mortgage on your primary residence. A Chapter 13 plan generally cannot modify a claim secured only by a lien on the debtor’s principal residence.⁵ You can’t use cramdown to reduce your home mortgage balance to the home’s current value. You can cure missed payments through the plan, but the underlying loan terms stay intact.

One narrow exception exists. If the final payment on the original mortgage schedule falls due before the last payment under the Chapter 13 plan, the mortgage can be modified.⁵ That situation is uncommon but sometimes arises with short-term mortgages nearing the end of their term.

Lien Stripping on Junior Mortgages

Lien stripping is a close cousin of cramdown that surprises many homeowners. You can’t cram down a first mortgage on your home, but you can sometimes eliminate a second mortgage or home equity line of credit entirely. The question is whether any equity exists to support the junior lien.

If your home is worth less than the balance on your first mortgage alone, the second mortgage has no collateral value at all. The junior lien is then “wholly unsecured,” the anti-modification protection no longer applies, and the second mortgage gets reclassified as an unsecured claim, treated like credit card debt or medical bills in the plan. Multiple federal appeals courts have endorsed this approach, relying on the interplay between the valuation rules and the anti-modification provision.¹ If even a dollar of equity supports the junior lien, the protection kicks in and the lien survives.

Chapter 13, Chapter 11, and Subchapter V

The concept exists across chapters, but the standards and typical players differ.

Chapter 13

This is where most individual debtors encounter cramdowns, usually on car loans. The debtor proposes a plan, and if a secured creditor objects, the court can still confirm it as long as the creditor receives payments whose present value equals the allowed secured claim amount. The 910-day and one-year restrictions above apply only in Chapter 13.⁴

Chapter 11

Chapter 11 cramdowns involve higher stakes. When a class of creditors votes against a reorganization plan, the debtor can still push it through if it meets two conditions: it doesn’t discriminate unfairly among creditors of similar priority, and it is “fair and equitable” to the objecting class.⁶ For secured creditors, fair and equitable means the creditor keeps its lien and receives deferred payments whose present value equals the collateral’s value.

Chapter 11 also enforces the absolute priority rule. If an unsecured class rejects the plan, no class junior to it, including the debtor’s equity holders, can receive anything unless the unsecured class is paid in full.⁶

Subchapter V

Subchapter V offers a streamlined reorganization path for small businesses. If creditors reject the plan, the debtor can still get confirmation by committing all projected disposable income for three to five years and showing a reasonable likelihood of making the payments.⁷ Unlike traditional Chapter 11, the absolute priority rule does not apply, so business owners can keep their equity even over creditor objections as long as the disposable income commitment is met.

What the Court Has to Find

No cramdown happens automatically. The plan has to clear several tests before the court will confirm it over an objection.

Best Interest of Creditors

Every creditor must receive at least what it would get if the debtor’s assets were liquidated in a Chapter 7 case. This floor applies in both Chapter 13 and Chapter 11.⁴⁶ If liquidation would pay an unsecured creditor $3,000, the plan has to deliver at least $3,000 in value to that creditor.

Fair and Equitable Treatment

For a secured creditor in a cramdown, the plan must provide payments whose present value equals the collateral’s value, and the creditor keeps its lien.⁶ The creditor need not agree, but it has to be no worse off than repossessing and selling the asset.

Feasibility

The court won’t confirm a plan the debtor can’t afford. You need to show enough income to cover every payment the plan requires, from the crammed-down secured amount to administrative expenses to whatever percentage unsecured creditors are promised. Many cramdown attempts fail here, not on the legal theory but on the budget.

Fighting Over Value

Because the whole outcome turns on what the collateral is worth, valuation is often the most contested issue. The debtor wants the lowest defensible number; the creditor wants the highest. For a vehicle, that can mean competing pricing guides and testimony about condition and mileage. For real estate, it usually means dueling appraisals.

The debtor typically bears the burden of proving value through declarations or testimony from qualified witnesses. Courts determine value “in light of the purpose of the valuation and of the proposed disposition or use” of the property.¹ That gives judges wide discretion. A car the debtor plans to keep and drive can be valued differently than one being surrendered.

Taxes on the Reduced Debt

When a cramdown wipes out part of what you owe, that forgiven portion would ordinarily count as taxable income. Canceled debt is generally treated as income that must be reported.⁸ A $20,000 loan reduced to $12,000 would in theory create $8,000 of cancellation-of-debt income.

Bankruptcy carries an important exception. Debt discharged in a Title 11 case is excluded from gross income entirely.⁹ The trade-off is a reduction in certain tax attributes, such as net operating losses or the basis of your property, reported on IRS Form 982.¹⁰ Most individual Chapter 13 debtors have limited attributes to reduce, so the practical impact is often small. For business debtors in Chapter 11 with significant net operating losses, attribute reduction can meaningfully affect future tax planning.

1
Office of the Law Revision Counsel. 11 USC 506
2
Legal Information Institute. Till v. SCS Credit Corp.
3
Federal Reserve Board. H.15 – Selected Interest Rates (Daily)
4
Office of the Law Revision Counsel. 11 USC 1325
5
Office of the Law Revision Counsel. 11 USC 1322
6
Office of the Law Revision Counsel. 11 USC 1129 – Confirmation of Plan
7
Office of the Law Revision Counsel. 11 USC 1191
8
Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
9
Office of the Law Revision Counsel. 26 USC 108
10
Internal Revenue Service. About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness