Cram What? The Bankruptcy Tool With The Weird Name

Have you ever tried to give a cat a pill? It’s not a pleasant task. You have to pry open its jaws, cram the pill down the poor thing’s throat, then cross your fingers and hope it doesn’t decide to cough it up and force you to start the process all over. 

Now, imagine the cat is a creditor watching one of its debtors go through the Chapter 13 bankruptcy process. They want to get paid back for the money they have loaned out. They don’t want the debt they are owed to be forgiven or renegotiated. So sometimes the court has to cram a solution favoring the debtor down the creditor’s throat. 

Section 1129(b) of the Bankruptcy Code outlines what has become known as the cramdown process for the way it is crammed down the throats of creditors. It allows a Chapter 13 bankruptcy court to reduce the amount of an outstanding loan to match the value of the property securing it. 

What debt can be crammed down? 

Only certain types of debt can be crammed down. The biggest restriction is that the debt must be secured debt. A secured debt is a debt that is tied to a piece of real estate or personal property — like a car or a piece of furniture — that can be repossessed by the creditor if the debtor fails to repay his or her debts. 

The law further restricts cramdowns by preventing the courts from cramming down the mortgage on the debtor’s primary residence. Mortgages on investment properties may be crammed down, but only if the debtor can repay the debt fully during the 3 to 5 year Chapter 13 process. 

Loans on personal property — things that can be owned other than real estate —- can all be crammed down if they were purchased more than a year before the debtor filed for bankruptcy. It is common to cramdown loans on household goods like appliances and furniture. 

The most common type of cramdown is a bit harder to get, and that is a cramdown on a car loan. Other than a home, a car is the most expensive item most people will ever purchase. In order to prevent debtors from buying a car, and then cramming the loan down as the vehicle’s value drops, the cramdown law says car loans cannot be crammed down unless the car was purchased over 910 days prior to the bankruptcy filing. This works out to around 2 ½ years. 

An example of this bankruptcy tool

This is probably easier to understand with a little example. Say there is a debtor who has filed for Chapter 13 bankruptcy, and this is what they owe and how much that same property is actually worth:

  • Primary Residence worth $300,000 with a $450,000 mortgage
  • Rental Property worth $200,000 with a $250,000 mortgage
  • Furniture purchased 2 years ago, now worth $500, with a $1200 loan
  • 5-month-old dishwasher worth $200 with a $500 loan
  • Car 1, purchased 5 years ago, worth $7,000 with a $10,000 loan
  • Car 2, worth $25,000, purchased last year with a $30,000 loan

If the court does a cramdown, the following debts will remain: 

  • The mortgage on the primary residence cannot be crammed down.
  • The mortgage on the rental property may be crammed down to $200,000 if the debtor can pay off that amount during the Chapter 13 process. 
  • The furniture was purchased more than a year ago, so the loan can be crammed down to $500.
  • The dishwasher was purchased less than a year ago, so the loan cannot be crammed down. 
  • Car 1 was purchased more than 910 days ago, so the loan can be crammed down to $7,000.
  • Car 2 was purchased too close to the date of the bankruptcy filing to cramdown the loan. 

Another Tool In The Bankruptcy Toolbox

Cramdowns are another tool in the court’s bankruptcy toolbox. Working with an experienced Milwaukee bankruptcy attorney will ensure that the cramdown process is properly navigated by both creditors and debtors. 

Creditors Beware: Attempting To Collect After A Discharge Could Get You In Big Trouble

Although bankruptcy law is federal law, very few bankruptcy cases make it up to the Supreme Court. So, it is notable that the Justices delivered a unanimous decision in a bankruptcy case near the end of the court term that ended in June. In Taggart v. Lorenzen, the High Court made it clear that creditors who attempt to collect a debt after one has been granted a discharge will find themselves in big trouble. 

Taggert v. Lorenzen

Taggart v. Lorenzen is a complex case, as most cases that make their way up to the highest court are. If you are curious about the underlying facts, you can check out this summary from Oyez, or this one from SCOTUSblog. It is the court’s holding that we are going to talk about. 

In an opinion authored by Justice Breyer, the Court held that creditors who try to collect a debt after a discharge can be sanctioned for contempt of court not only if they knew what they were doing was wrong, but also if there was “no objectively reasonable basis” of their understanding of the discharge order or the statutes that govern its scope. 

This ruling has important implications because there are many circumstances where debts survive a bankruptcy discharge and can still be collected. When a debt survives, the creditor may try to collect it, and that is okay. But if a debt has been discharged, the creditor must write it off, and should not, under any circumstances, try to collect. The problem is there are a lot of debts in the gray area that may or may not be discharged, depending on the circumstances. 

A creditor who is owed a debt that may still exist needs to be extra careful and ensure the debt was not discharged before it makes any attempt to collect. Otherwise, the creditor may be found in civil contempt, which means they can be fined by the court. 

Creditors who want to collect debts owed by a person or entity that has filed for bankruptcy would be wise to consult with an experienced bankruptcy attorney. The accuracy of the advice you take could make the difference between collecting a debt and getting charged a hefty and embarrassing fine. 

Contact Our Milwaukee Bankruptcy Lawyer

Our firm has years of experience helping both creditors and debtors navigate the bankruptcy system, so we are in a good position to advise our clients even in tricky gray-area situations. 

Judge Rejects Shopko’s Bankruptcy Plan

On January 16th, Wisconsin based retail chain Shopko filed for chapter 11 bankruptcy. The company reported having less than $1 billion in assets with outstanding liabilities, running somewhere between $1 billion and $10 billion. As part of bankruptcy proceedings, the U.S. Bankruptcy court had Shopko officials, along with creditors, attorneys and other consultants, draft a bankruptcy plan and submit it to the court for approval. Despite most relevant parties expressing approval for the plan, as well as U.S. Bankruptcy Court Judge Thomas Saladino supporting the effort drafting the plan, Judge Saladino had to ultimately reject it.

Why Was Shopko’s Bankruptcy Plan Rejected?

Under the plan submitted to Judge Saladino, all of Shopko’s bank debt would have been paid off by July. Additionally, the majority of administrative claims would have been paid and a $15.5 million payback from Sun Capital would have been secured. On top of all this, there may have been some money left over to pay some of the unsecured creditors. Why then was this bankruptcy plan rejected by the court? One of the major creditors, McKesson Corporation, told the judge that it had civil fraud claims against no less than four Shopko executives. The plan would have banned all potential claims against Shopko.

McKesson Corp. explained to the bankruptcy court that Shopko executives made false promises in order to keep medication supplies coming to Shopko pharmacies for as long as possible. Shopko never paid for these supplies and McKesson asserts that Shopko owes the company close to $70 million. Although the amount has since been reduced, McKesson maintains that Shopko still owes them $55 million. Furthermore, McKesson alleges that Shopko executives are using the bankruptcy plan to avoid being sued for fraud in Wisconsin. Wisconsin is the company’s state headquarters. Shopko counters by saying McKesson Corp. is being spiteful in holding up the otherwise supported bankruptcy plan.

What are Shopko’s options?

At this point, Shopko has several options in how to proceed. The company may opt to submit another plan. Right now, Shopko has the exclusive right to submit a plan, but this is only for a limited time. If they fail to submit a plan for approval, other parties of the case, including McKesson, could submit their own proposed plans.

Shopko may also want to consider converting the proceedings from chapter 11 bankruptcy to chapter 7. With chapter 11 bankruptcy, there is still a chance that the company could reorganize and continue moving forward. Under chapter 7 bankruptcy, the court would appoint a trustee that would assume control of the company from the executives. Judge Saladino left the decision of how to proceed up to Shopko.

Trusted Bankruptcy Attorneys

No matter your reason for considering bankruptcy, the road ahead may be difficult. There will be countless questions and concerns that will arise. The dedicated Milwaukee bankruptcy attorneys at Hanson & Payne are here to answer your questions and support you throughout the bankruptcy process. Contact us today.