Cramdown is a bankruptcy mechanism that lets a court approve a reorganization plan even when some creditors or equity classes vote against it — binding dissenters to the plan’s terms.

How it works

Under U.S. Chapter 11, confirmation requires meeting statutory tests: adequate information, good faith, feasibility, and best interests of creditors. For classes that reject the plan, the court can cram down if at least one impaired class accepts and the plan treats dissenting classes fairly and equitably.

In practice, senior lenders may propose a plan that converts debt to equity, wipes common stock, and injects new capital. Junior creditors and founders often lose everything unless they negotiate before filing.

Cramdown also appears outside bankruptcy in less formal workouts — though the legal force differs. Venture-backed companies rarely file Chapter 11, but growth-stage failures with significant debt can reach this outcome.

Why it matters

• Founders: Once cramdown dynamics apply, negotiating leverage shifts to senior creditors. Early transparent talks may preserve a small equity stake or employment role.
• Investors: Distressed funds analyze cramdown feasibility before buying debt. Preferred holders may be impaired differently than common depending on absolute priority rules.

Common mistake

Believing preferred stock guarantees protection in bankruptcy. Liquidation preference helps in sales, but in cramdown reorganizations, secured and senior claims often absorb most value first.

Related ideas

See also distressed investment, credit bid, absolute priority rule, and prepackaged bankruptcy.