Using Cramdowns to Advantage in Subchapter V Bankruptcy
Subchapter V is a simplified form of Chapter 11 bankruptcy that was created to make the reorganization process more accessible to small businesses. One advantage of Subchapter V is the reduction of a company’s debts through use of a procedure known as a cramdown.
Subchapter V bankruptcy has become especially important during the COVID-19 pandemic. As part of the governmental response to the resulting economic crisis, the CARES Act temporarily increased the debt threshold for this form of bankruptcy. A company can now file for Subchapter V as long as it has less than $7.5 million in business-related debt.
In a Subchapter V bankruptcy, the debtor agrees to a plan of reorganization that allows for repayment of a portion of unsecured debt over a three- to five-year period. At the end of the plan, remaining unsecured debt is discharged. Secured debts, such as mortgages, remain in force and must be paid off according to their terms.
However, the amount owed on a secured loan may sometimes exceed the fair market value of the collateral property. In that scenario, the bankruptcy court can order the debt reduced to an amount equal to the fair market value — in effect, “cramming down” the figurative throat of the creditor the reduced loan amount. The court can ignore the objections of the secured creditor as long as the repayment plan is fair and reasonable overall.
Cramdowns can be especially useful in reducing a company’s costs of financing its physical premises or operating equipment. For example, if there is a loan on a truck or piece of equipment with an unpaid balance of $25,000, but the fair market value is $7,500, the bankruptcy trustee and court can approve a plan that pays the creditor $7,500. This works to the benefit of the debtor, who can retain use of the equipment at reduced cost while freeing funds for repayment of other debts, all of which can help keep the business operating.
There are some limitations on cramdowns. They are not generally permitted for a mortgage on a primary residence unless the mortgage was obtained to fund the debtor’s business. In addition, any debts that are subject to a cramdown will not be discharged until the debtor has made all the payments contemplated in the reorganization plan.
At the Law Offices of Michael Jay Berger in Beverly Hills, I helps small businesses successfully navigate the Subchapter V reorganization process, including the use of cramdowns to reduce secured debt. I have decades of experience in the full range of bankruptcy proceedings. Schedule a free initial consultation by calling 310-271-6223 or contact me online.