Reinstatement
Generally, secured creditors are not anxious to resort to collateral. The process may be time consuming and expensive. Usually, a creditor would rather the debtor pay the debt, even if only through a resumption of installment payments called for under the original payment obligation. Accordingly, in many circumstances, even where the secured creditor has invoked an acceleration clause, the secured creditor may welcome reinstatement of the obligation upon the debtor's tender of amounts in default, together with interest, penalties, and costs of collection, if any. Reinstatement de-accelerates any obligation that may have become due under the terms of an acceleration clause and returns the debtor to the original contractual payment schedule.
There will be cases in which the secured creditor will not welcome reinstatement. The debtor may have a history of default or the creditor may be convinced that reinstatement will soon be followed by another default. The creditor may fear for the continued value or availability of the collateral. Or the creditor may see an opportunity to reinvest funds for a higher return. Nonetheless, a debtor (or subordinate lienholders) may have a statutory right to reinstate that effectively rewrites the contract of the parties by overcoming the secured lender's contractual right to accelerate under an acceleration clause.
A right to reinstate is a cardinal feature of real property secured transactions in California. See Cal. Civ. Code 2924c(a)(1). For a non-judicial foreclosure, reinstatement is permitted until five business days prior to the date set for the foreclosure sale. See Cal. Civ. Code 2924c(e). For a judicial foreclosure, reinstatement is permitted at any time prior to entry of the judicial decree of foreclosure. See Cal. Civ. Code 2924c(a)(1). In other jurisdictions statutory rights to reinstate may be broader in some respects (e.g., in Pennsylvania, a debtor may reinstate until one hour prior to the time set for a judicial foreclosure sale), narrower (e.g., in Texas, after default, lienholder must give debtor notice of default giving debtor at least 20 days to cure the default before a notice of non-judicial foreclosure sale may be given, but no further right to reinstate), or non-existent (e.g., in Oklahoma, no right to reinstate except as provided in the security instrument).
Article 9 does not permit the debtor to reinstate debt secured by personal property or fixtures. A limited right to reinstatement was drafted during the Article 9 revision process but ultimately was not adopted. But Article 9 will be supplemented in some states by consumer protection legislation granting the right to reinstate in defined circumstances. See U.C.C. 9-201(b),(c) (consumer protection legislation supplements provisions of Article 9). For example, in California a debtor defaulting on debts secured by motor vehicles may reinstate in some circumstances. See, e.g., Cal. Civ. Code 2983.3 (governing purchase-money security interests in favor of automobile dealer created in motor vehicle purchased from dealer); Cal. Fin. Code 22329 (governing purchase-money and non-purchase money security interests in motor vehicle in favor of a consumer finance lender such as a small loan company). In contrast, a debtor does not have a right to reinstate a purchase-money loan secured by a mobilehome, although the secured party must give the debtor a notice of default that includes a description of any reinstatement the secured party chooses to allow. Cal. Health & Safety Code 18037.5.
Federal bankruptcy law provides an alternative to the debtor who is not permitted to reinstate by the creditor or not entitled to reinstate by contract or by state law. Chapter 13 of the Bankruptcy Code, which permits individuals receiving a regular income to force certain payment plans upon unwilling creditors, and Chapter 11 of the Bankruptcy Code, typically utilized by commercial enterprises to leverage financial reorganization, may provide the debtor the rough equivalent of reinstatement even where reinstatement is not available or is no longer available under state law. For a brief introduction to those alterantives, see Commentary.Chapter 13 and Commentary.Chapter 11.
Do not confuse reinstatement with redemption. Through reinstatement a debtor cures default and resumes payment under terms originally negotiated. In contrast, a debtor redeems when it purchases the release of collateral from a lien for a price equal to the total amount of the debt owed. Reinstatement will generally be more attractive to the debtor, or to a subordinate lienholder, because it typically requires a much smaller immediate cash outlay than redemption. We consider redemption further in Commentary.Redemption.