How Cramdowns Can Help With a Chapter 11 Reorganization
A cramdown is a powerful tool available under the U.S. Bankruptcy Code, allowing a court to approve a business’s Chapter 11 reorganization plan even if certain creditors object. In essence, a cramdown prevents a single group of creditors from holding up a plan that would keep the business running, preserve jobs and potentially pay creditors more in the long run.
Businesses in financial distress typically owe debts to multiple types of creditors, ranging from banks to suppliers to bondholders, who may not always agree on what is best for keeping the business solvent. A minority group of creditors may object to reorganization plan confirmation, not because the plan is unfair but in hopes of extracting more favorable terms. Without a cramdown process, an otherwise viable company would be vulnerable to these kinds of holdout tactics, potentially forcing it into liquidation. Cramdowns ensure that a good-faith restructuring effort can proceed for the benefit of the business and of the majority of its creditors.
The cramdown process works as follows: The debtor business proposes a reorganization plan that may include adjustments to existing debts, revised payment schedules or reductions in interest rates. The plan is then voted on by various classes of creditors. For the court to consider confirming the plan despite dissent, most creditor classes must vote to accept it. When a dissenting class refuses to approve, the debtor can ask the bankruptcy court to confirm the plan via a cramdown. The judge closely reviews the proposal to confirm that it is fair, feasible and compliant with all bankruptcy code requirements.
A central requirement is that the plan be “fair and equitable.” For secured creditors, this means they must receive payments totaling at least the current value of the collateral securing their claims — even if the original debt was higher. Unsecured creditors must be assured at least as much as they would receive if the business were liquidated in a Chapter 7. The court ensures that no creditor class is unfairly favored at the expense of others.
Used strategically with the aid of skilled Chapter 11 counsel, cramdowns allow companies to reduce secured debts to match the actual value of assets; stretch out repayment schedules to free up much-needed cash; and lower interest rates to a sustainable level. Most importantly, they prevent a minority creditor group from derailing a plan that benefits the overall business, its employees and its stakeholders. For business owners, the ability to use a cramdown shifts the negotiating balance, often making the difference between saving the company and closing its doors.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms. If your company needs help with debt reorganization, contact us online or call 310-271-6223 to schedule a consultation.
