Redemption

     Prior to default, a debtor's payment in full of an outstanding secured debt, together with any applicable pre-payment penalty, or the debtor's performance of any other secured obligation, extinguishes any lien securing the debt, unless the secured creditor has committed to future secured advances. This is simply pre-payment, not redemption.

     Redemption prior to foreclosure

     After default and prior to foreclosure, the debtor's payment in full or other required performance (together with any accumulated interest, applicable penalties, and costs of collection including attorney's fees) will extinguish the relevant lien. Payment or other performance in full after default is known as redemption.  Webster's New Collegiate Dictionary (1975) defines redemption as follows:: "to buy back; to free from captivity by payment of ransom; to free from the consequences of sin." You get the picture. U.C.C. 9-623 governs redemption of property subject to an Article 9 security interest.

     The right to redeem evolved from the intervention of equity to prevent forfeiture of a debtor's interest in property upon default. Early lenders secured debt by real property through the form of an absolute conveyance of title subject to defeasance. For example, the debtor might convey title to the debtor's real property: "to [lender], but if I, [debtor], repay the sum of $ ____ by October 1, 1645, title shall revert to me." Thus, the lender retained title only upon the debtor's default. Of course this device could work great hardship; even trivial default (a day late or a dollar short) resulted in the debtor's forfeiture of all of its equity in the property conveyed. Faced with forfeiture, debtors obtained relief from courts of equity in the form of an extension of time to pay. This relief came to be known as the "equity of redemption," i.e. a right to redeem the property from the lender upon cure of default. Lest the period of redemption extend indefinitely, lenders in turn obtained relief to terminate the debtor's equity of redemption after a reasonable period of time. The phrase strict foreclosure developed to describe termination of the debtor's equity of redemption. 

     Redemption requires payment in full of the outstanding obligation.  See U.C.C. 9-623 and its Official Comment 2).  In many cases of installment payment obligations, the terms of the obligation afford the secured party the right to accelerate the entire indebtedness.   In such cases, debtors who are also obligors are rarely in a position to redeem, financial difficulties usually having caused default in the first place.  In the real property context, it is therefore common for a debtor to attempt to rescue any of its equity in the property by listing the real property for sale following the initiation of non-judicial foreclosure proceedings with the hope that a voluntary sale, with escrow closing prior to the foreclosure sale, will generate sufficient funds to pay off all outstanding liens and all closing costs and leave some money for the debtor. A debtor may attempt the same rescue of equity in personal property (e.g. an automobile) by trying to find a buyer willing to pay more than the amount of debt secured by the personal property.

     Federal bankruptcy law offers some additional alternatives. In a consumer Chapter 7 proceeding, a consumer debtor may redeem certain personal property from a lien by paying the amount of the debt or the value of the collateral, whichever is less. In a Chapter 13 proceeding, a consumer debtor may do the same thing in installments.   We explore these alternatives more fully in Commentary.Consumer Chapter 7 and Commentary.Chapter 13, respectively. 

     Redemption after foreclosure

     Some states permit a debtor to redeem real property after a judicial foreclosure sale, generally referred to as post-sale or statutory redemption.  Article 9 does not afford the debtor a comparable right.