Cramdown: Reducing a Secured Debt to the Collateral's Value

How does cramdown actually work?

Cramdown starts with a valuation. Under 11 U.S.C. § 506(a)(1), an allowed claim secured by a lien is a secured claim only to the extent of the value of the creditor's interest in the property, and is an unsecured claim to the extent the claim exceeds that value. So a $15,000 car loan against a car worth $11,000 becomes an $11,000 secured claim and a $4,000 unsecured claim.

The Chapter 13 plan then treats those two pieces differently. The secured piece is generally paid in full through the plan, with interest, because 11 U.S.C. § 1325(a)(5)(B)(ii) requires that the value of property distributed on account of the claim, as of the plan's effective date, be at least the allowed amount of that claim. The unsecured piece falls in with your other general unsecured debts and is paid whatever percentage the plan pays them.

A published court hypothetical describes exactly this: a 2018 Subaru worth $11,000 with $15,000 owed, crammed down to $11,000 with the interest rate reduced by the plan (CANB official material — Ralph and Alice Cramdown Hypothetical).

• Step 1: the court determines the value of the collateral under § 506(a).
• Step 2: the claim splits into a secured claim at that value and an unsecured claim for the rest.
• Step 3: the plan pays the secured claim in full with interest and treats the remainder as general unsecured debt.
• Step 4: the creditor keeps its lien until the underlying debt is paid or discharge is entered.

What changes the answer for your particular loan?

Four things move this analysis more than anything else. The first is what the collateral is: a vehicle, a rental property, a second home, business equipment, or your principal residence each sit differently in the statute. The second is when you bought it, because the hanging paragraph following 11 U.S.C. § 1325(a)(9) shuts off § 506 entirely for certain recent purchases.

The third is what the collateral is worth, which is a factual question decided on evidence, not on what you or the lender assert. The fourth is whether you are in Chapter 13 at all. Lien stripping is not permitted in Chapter 7 cases (Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)).

One more thing matters and is easy to miss: cramdown reduces what the plan must pay a secured creditor, but it does not reduce what you must be able to afford. 11 U.S.C. § 1325(a)(6) requires the court to find that you will be able to make all payments under the plan.

What does federal law actually say about the 910-day rule?

This is the rule that stops most car cramdowns. The unnumbered paragraph at the end of 11 U.S.C. § 1325(a) — lawyers call it the hanging paragraph — states that for purposes of paragraph (5), section 506 shall not apply to certain claims. It reaches a debt incurred within the 910 days before filing where the collateral is a motor vehicle acquired for the debtor's personal use, and any other thing of value where the debt was incurred within one year of filing.

When the hanging paragraph applies, § 506's split simply does not happen for that claim. There is no secured piece and unsecured piece; the plan generally has to deal with the claim as a whole if you keep the vehicle. The practical effect is a rough deadline: a car financed inside roughly two and a half years of your filing date is commonly outside cramdown, while an older loan commonly is not.

The hypothetical published by one court labels such a claim a "910 claim" and treats it by paying the secured balance in full through the plan (CANB official material — Ralph and Alice Cramdown Hypothetical).

What interest rate does a crammed-down loan carry?

Cramdown does not just reduce the principal; it usually resets the rate. That is because 11 U.S.C. § 1325(a)(5)(B)(ii) measures the plan's distributions by their value "as of the effective date of the plan," not by their face amount. Paying $11,000 in monthly installments over five years is worth less today than $11,000 handed over now, so the plan has to add interest to close that gap.

Congressional commentary on the parallel confirmation standard explains the mechanic plainly: valuing consideration as of the effective date "contemplates a present value analysis that will discount value to be received in the future; of course, if the interest rate paid is equivalent to the discount rate used, the present value and face future value will be identical" (11 U.S.C. § 1129).

The rate is therefore a plan term, not a contract term, and it is frequently lower than the rate on a subprime auto loan. In the published hypothetical, one vehicle's rate was reduced to 5 percent by the plan (CANB official material — Ralph and Alice Cramdown Hypothetical). Your district's practice and the court's ruling govern the actual number.

Where do state or local rules differ?

The cramdown right itself is federal and does not change from state to state. What changes is procedure, and it changes a lot. Fed. R. Bankr. P. 3012 permits a request to determine the amount of a secured claim by motion, in an objection to a claim, or in a plan filed in a Chapter 12 or 13 case — but districts pick among those routes and add their own requirements.

Some districts require a separate motion. New Hampshire's LBR 3012-2 requires the motion be titled "Motion to Determine Secured Status and Limit Secured Claim," contain a specific allegation stating the basis for the value, attach supporting documentation, and be served within thirty days of the concluded 341 meeting (LBR 3012-2). Maryland's rules let a Chapter 13 debtor value collateral either by motion or by a plan provision, and require the motion to be accompanied by evidence of value (Bankr. D. Md. official guidance — Local Bankruptcy Rule).

Check your own court before you rely on any of this. Find yours at /courts.

What does cramdown look like in practice?

In practice this is a valuation fight followed by a plan provision. You state a value, back it with evidence, and the lender either accepts it, negotiates, or objects and puts on its own evidence. The judge decides.

A published court hypothetical shows several secured debts handled at once in a single plan: a refinanced 2015 vehicle worth $10,000 with $8,000 owed, paid in full but at a reduced 5 percent rate; a 2018 vehicle worth $11,000 with $15,000 owed, crammed down to $11,000; a 2020 vehicle bought two years earlier treated as a "910 claim" and paid in full; a second mortgage stripped by the plan; and a judgment lien avoided by the plan (CANB official material — Ralph and Alice Cramdown Hypothetical).

That mix is typical. One household can have one loan crammed down, one loan protected by the 910-day window, and one junior lien removed entirely, all in the same case. Which bucket each debt lands in is what a lawyer works out first.

What documents and information are involved?

Valuation is evidentiary, so the paperwork matters more here than in most parts of a case. Local rules are explicit about it: New Hampshire requires a specific allegation stating the basis for the asserted value plus supporting documentation filed with the motion (LBR 3012-2). Maryland requires evidence of the value of the property, and — where no proof of claim has been filed by senior lienholders — evidence of the amount of those senior claims (Bankr. D. Md. official guidance — Local Bankruptcy Rule).

One district's checklist asks that the motion describe the collateral, including the address and legal description for real property and the VIN for vehicles, and identify the lienholder with a redacted loan number (Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)).

• Loan documents showing the payoff balance, the purchase date and the original terms
• The vehicle's VIN, or the legal description and street address for real property
• Evidence of value — a private appraisal, a county valuation, or another stated basis
• Payoff figures for every lien senior to the one you are challenging
• The proof of claim filed by the creditor, if one has been filed

What should you ask a lawyer about cramdown?

Bring the purchase dates. Almost every cramdown conversation turns on them, and it is the one fact you can gather before the meeting. Bring the payoff balances and any recent valuation you have, too.

Then ask the questions that decide whether this strategy is available to you at all, and what it costs to pursue it. Filing fees are set nationally — the Chapter 13 filing fee is $235 (28 U.S.C. § 1930(a)(1)(B)) plus a $78 administrative fee (Bankruptcy Court Miscellaneous Fee Schedule, Item 8) — but attorney's fees for a contested valuation are not, and a valuation fight is extra work.

• Does the hanging paragraph after § 1325(a)(9) reach any of my vehicles, given when I bought them?
• What value would you argue for this collateral, and what evidence would support it?
• Does this district value collateral by motion or through the plan, and on what timetable?
• What interest rate is this court likely to approve on the crammed-down claim?
• What would my plan payment look like with the cramdown, and without it?
• Is the lender in my case one that routinely objects to valuations?

Frequently asked questions

Can I cram down the mortgage on my own home?

Generally no. Courts describe Chapter 13 and individual Chapter 11 debtors as not permitted to "strip down" a junior lien on their principal residence to the value of the collateral, though a wholly unsecured junior lien on a residence can commonly be "stripped off" where there is no equity above the senior liens (Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)).

Is cramdown available in Chapter 7?

No. Lien stripping is not permitted in Chapter 7 cases (Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)). Cramdown is a plan treatment, and Chapter 7 has no repayment plan through which a reduced secured claim could be paid. This is one of the more common reasons people who want to keep financed property look at Chapter 13 instead.

How is my car's value determined?

By statute. For an individual in a Chapter 7 or 13 case, 11 U.S.C. § 506(a)(2) sets value for personal property at replacement value as of the petition date, without deduction for costs of sale or marketing. For property acquired for personal, family, or household purposes, replacement value means the price a retail merchant would charge for property of that kind given its age and condition.

Does the lender keep its lien after a cramdown?

Yes. Under 11 U.S.C. § 1325(a)(5)(B)(i), a plan that keeps the property must provide that the holder retains its lien until the earlier of payment of the underlying debt determined under nonbankruptcy law, or discharge under section 1328. If the case is dismissed or converted before the plan is completed, the lien is also retained to the extent nonbankruptcy law recognizes it.

What if I bought the car 900 days before filing?

That falls inside the 910-day window in the hanging paragraph after 11 U.S.C. § 1325(a)(9), so if the vehicle was acquired for your personal use, § 506 would not apply to that claim for § 1325(a)(5) purposes. The date you incurred the debt, not the date you first drove the car, is what the paragraph measures, and it is worth confirming against the loan documents.

Can the creditor object to my valuation?

Yes, and they often do. A valuation request seeks relief against a specific, identifiable party, so the creditor must be served and can oppose it (CANB official material — Guidelines for Valuing Collateral 1.31.18). Fed. R. Bankr. P. 3012 requires notice to the claim holder and any other entity the court designates. Contested valuations are decided by the judge on the evidence presented.

Does a cramdown lower my monthly plan payment?

Not necessarily. It lowers what the plan must pay that particular creditor, but your plan payment is driven by everything the plan has to cover, including the feasibility finding 11 U.S.C. § 1325(a)(6) requires. Money freed from a secured claim frequently flows to other creditors rather than out of the payment. Ask a lawyer to model both versions before assuming savings.

Does an undersecured creditor keep an unsecured claim for the shortfall?

Generally yes, and that claim is real. Under 11 U.S.C. § 506(a)(1), the portion of the claim above the collateral's value is an unsecured claim. It shares in whatever distribution your plan makes to general unsecured creditors. That is why cramdown reduces what a lender collects but rarely erases the shortfall outright.

Sources

• 11 U.S.C. § 506 — Determination of secured status · official source
• 11 U.S.C. § 1325 — Confirmation of plan · official source
• 11 U.S.C. § 1129 — Confirmation of plan
• Fed. R. Bankr. P. 3012 — Determining the Amount of a Secured or Priority Claim · official source
• CANB official material — Ralph and Alice Cramdown Hypothetical
• CANB official material — Guidelines for Valuing Collateral 1.31.18
• Bankr. M.D. Fla. Procedure Manual — Motion to Determine Secured Status - Value (and Strip Lien if Applicable)
• LBR 3012-2 — Valuation of Personal Property and Non-Residential Real Property
• Bankr. D. Md. official guidance — Local Bankruptcy Rule
• 28 U.S.C. § 1930(a)(1)(B)
• Bankruptcy Court Miscellaneous Fee Schedule, Item 8

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