What Is a Cramdown in Bankruptcy? Rules, Limits, and Lien Stripping

A cramdown in bankruptcy is a court order that forces a secured creditor to accept modified loan terms, even when the creditor objects. It reduces the secured portion of a debt to the current value of the collateral, resets the interest rate, and leaves the rest of the balance to be treated as unsecured debt. The tool shows up most often in Chapter 13 and Chapter 11 cases, and for debtors who owe more on an asset than it’s worth, it can be the difference between keeping that asset and losing it.

How the Split Works

Every cramdown starts with a single question: what is the collateral actually worth right now? Under federal bankruptcy law, a secured claim is only “secured” up to the value of the property backing it.¹ If the debt exceeds that value, the court splits the claim in two: a secured portion equal to the collateral’s market value, and an unsecured portion for the remaining balance.

Say you owe $20,000 on a car loan, but 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 through your bankruptcy plan; the $8,000 gets lumped in with your other unsecured debts and paid at whatever percentage the plan provides. In many Chapter 13 cases, unsecured creditors receive only a fraction of what they’re owed, and any unpaid balance is discharged when the plan ends.

For personal property in individual Chapter 13 or Chapter 7 cases, the court values collateral at its “replacement value,” roughly what a retail seller would charge for similar property in the same condition.¹ Chapter 11 courts have more flexibility in choosing both the valuation method and the date on which value is measured, depending on the proposed use of the collateral.

The New Interest Rate

Reducing the principal is only half of it. The court also resets the interest rate on the new secured balance. In Till v. SCS Credit Corp., the Supreme Court set out the “formula approach”: start with the national prime rate and add a risk adjustment for the higher default risk that bankrupt borrowers carry.² Courts have generally approved risk adjustments in the range of 1% to 3% above prime.

With the national prime rate at 6.75% as of early 2026, a typical cramdown interest rate falls somewhere between roughly 7.75% and 9.75%.³ The court weighs the nature of the collateral, the length of the plan, and the debtor’s overall financial picture when setting the precise adjustment. The result is usually well below the original contract rate, especially on subprime auto loans and other high-interest financing that borrowers often carry into bankruptcy.

Which Debts Can Be Crammed Down

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

Vehicle Loans

Car loans are the most common target, but only if you bought the vehicle more than 910 days (about two and a half years) before filing. This restriction sits in what practitioners call the “hanging paragraph” and prevents debtors from buying a car on credit and immediately cramming the loan down.⁴ If your loan is older than 910 days, you can reduce the secured balance to the vehicle’s current value, get the new interest rate under the Till formula, and repay that reduced 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 waiting period. Debts incurred within one year before filing are protected. Debts older than one year can be crammed down to the collateral’s current value.⁴

Investment Property and Second Homes

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

What’s Protected From Cramdown

The largest carve-out belongs to 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 cure missed payments through a Chapter 13 plan, but you can’t use cramdown to reduce the balance to the home’s current market value.

There is one narrow exception. If the last payment on the original mortgage schedule comes due before the final payment under the Chapter 13 plan, the mortgage can be modified.⁵ That situation is uncommon, but it comes up occasionally with short-term mortgages or loans near the end of their term when the debtor files.

Lien Stripping on Second Mortgages

Lien stripping is a close cousin of cramdown that catches many homeowners by surprise. 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 key 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. At that point the junior lien is “wholly unsecured,” and the anti-modification protection no longer applies. The second mortgage gets reclassified as an unsecured claim and 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 one dollar of equity supports the junior lien, the protection kicks in and the lien survives.

Cramdowns by Chapter

The cramdown concept exists across chapters, but the legal standard and the typical players are different.

Chapter 13

Chapter 13 is where individual debtors most often encounter cramdowns, primarily on car loans. The debtor proposes a plan, and if the secured creditor objects, the court can still confirm the plan as long as the creditor receives payments whose present value equals the allowed secured claim amount. The 910-day and one-year restrictions apply only in Chapter 13.⁴

Chapter 11

Chapter 11 cramdowns involve higher stakes and more complex negotiations. When a class of creditors votes against the reorganization plan, the debtor can still push it through if it doesn’t discriminate unfairly among creditors of similar priority and is “fair and equitable” to the objecting class.⁶ For a secured creditor, “fair and equitable” means the creditor keeps its lien and receives deferred payments with a present value at least equal to the value of its collateral interest.

Chapter 11 also enforces the absolute priority rule for unsecured creditors. If an unsecured class rejects the plan, no junior class (including the debtor’s equity holders) can receive anything unless that unsecured class is paid in full.⁶ Most contested Chapter 11 cramdowns get fought on this ground, because business owners who want to keep their equity have to satisfy every senior class first.

Subchapter V

Subchapter V offers a streamlined reorganization path for small businesses. If creditors reject the plan, the debtor can still obtain confirmation by committing all projected disposable income for three to five years to plan payments and showing a reasonable likelihood of making those payments.⁷ The absolute priority rule does not apply, so owners can retain their equity interest 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 as much through the plan as it would receive if the debtor’s assets were liquidated in Chapter 7. This floor exists 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.

Fair and Equitable Treatment

For a secured creditor in a cramdown, the plan must provide payments whose present value equals the value of the collateral, and the creditor keeps its lien on the property.⁶ The creditor isn’t worse off under the plan than it would be repossessing and selling the asset.

Feasibility

The court won’t confirm a plan the debtor can’t afford to complete. The debtor has 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. This is where many cramdown attempts fail. Not because the legal theory is wrong, but because the budget doesn’t add up.

Fighting Over Value

Because the whole cramdown hinges on what the collateral is worth, valuation is often the most contested issue in the case. The debtor wants the lowest defensible number; the creditor wants the highest. For a vehicle, that can mean competing NADA or Kelley Blue Book printouts 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 language gives judges significant discretion. A car the debtor plans to keep and drive may be valued differently than one being surrendered. For lower-value collateral, the cost of fighting over valuation can approach the savings the cramdown would produce.

What About Taxes on the Reduced Debt

When a cramdown reduces what you owe, the forgiven portion would normally count as taxable income. Canceled debt is generally treated as income that must be reported on your tax return.⁸ A $20,000 loan crammed down to $12,000 would theoretically create $8,000 in cancellation-of-debt income.

Bankruptcy provides an important exception. Debt discharged in a Title 11 bankruptcy case is excluded from gross income entirely.⁹ The catch is that the exclusion requires 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 tax attributes to reduce, so the practical impact is often minimal. For business debtors in Chapter 11 with significant net operating losses, the attribute reduction can shape future tax planning in meaningful ways.

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