Chapter 11 Bankruptcy: The “Cram Down”

A key component of any Chapter 11 bankruptcy is the reorganization plan that details how the debtor will treat each creditor, which creditors will get paid and how much they’ll get paid, and which creditors will not get paid or, at least, will not get paid all they are owed. When a Chapter 11 debtor develops a reorganization plan, the creditors get to vote on it. A majority of creditors must approve the plan in order for it to be “confirmed” and put into action.

As you can imagine, sometimes creditors object to a plan even though it is a good plan. In these cases, the debtor may be able to use a provision of U.S. bankruptcy law known as the “cram down” provision to force creditors to accept the plan. However, to succeed with the cram down provision, the proposed plan must meet certain statutory requirements and have the approval of the bankruptcy judge.

Requirements for Confirming a Plan Using the Cram Down Provision

In order for a bankruptcy judge to use the cram down provision and confirm a reorganization plan over the objections of creditors, the plan must meet the following requirements:

• The debtor must show that the plan is fair and equitable, which means:
  • Senior or priority creditors must be paid in full before paying junior creditors
  • No interest holder may receive or retain property of the estate unless creditors are paid in full or new value is contributed

• The debtor must show that the plan does not discriminate against any class of creditor, particularly any class that objects to the plan, unless there is a justifiable reason for the discrimination (such as paying creditors necessary to business operations before paying a creditor with an old debt because the first is necessary to continue generating revenue)
• The plan must pay each secured creditor the entire value of the asset used to secure the claim or the entire value of the claim, whichever is less
• In regard to unsecured creditors, one of the following must apply
  • The plan pays each unsecured creditor the entire value of the creditor’s claim
  • Owners of the debtor company do not retain any property or interest in the debtor company after reorganization (unless they contribute “new value” to the plan)
  • Unsecured creditors, as a class, approve the plan
• The plan pays each claim holder at least as much as they would have received under a Chapter 7 liquidation bankruptcy

The Cram Down Provision and the Value of an Experienced Maryland Chapter 11 Bankruptcy Attorney

If a debtor can persuade creditors to confirm a reorganization plan without use of the cram down provision, bankruptcy proceedings can be completed more quickly and with less conflict. Employing a Maryland bankruptcy attorney who is experienced in Chapter 11 bankruptcy proceedings can minimize the potential for rejection of a reorganization plan by anticipating creditors’ objections and reasoning. A debtor who is prepared to respond to objections usually encounters fewer votes against their plan.

Should a creditor or group of creditors stubbornly refuse to accept a plan, an experienced attorney is better equipped to present arguments and evidence that will persuade a bankruptcy judge to employ the cram down provision.

In Maryland, Chapter 11 bankruptcy attorney John Burns and his firm can help you develop a Chapter 11 reorganization plan likely to gain favor with creditors. Put Mr. Burn’s extensive experience in Chapter 11 bankruptcies to work anticipating your creditors’ objections and arguing your case persuasively and effectively in court.

Call our office at 301-441-8780.