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 in the post-default context 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 in the personal property context. In California, Cal. Civ. Code 2903, 2904, and 2905 govern redemption in the real property context. In the real property context, the right to redeem is sometimes referred to as the equity of redemption.
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. You will find a useful description of these developments in Justice Scalia's one paragraph history in BFP v. Resolution Trust Corporation.
Because redemption requires payment in full of the outstanding obligation (see, e.g. U.C.C. 9-623 and its Official Comment 2), debtors 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.
Junior lienholders may also redeem. Junior secured parties may be in a better financial position to redeem (it is not their financial difficulties that have caused a default), but doing so makes sense only if there is equity in the property to which the junior secured party will succeed and only if the junior secured party is also in a position to service any debt secured by remaining senior secured liens or is prepared to offer and close a sale of the property to a third party prior to foreclosure by the holder of a senior lien. The holder of a senior lien may very well be prepared to delay its own foreclosure upon seeing the holder of the junior lien market the property. Note that a senior lienholder could redeem from a foreclosure by the holder of a junior lien, but there is no reason for the senior lienholder to do so because the purchaser at the foreclosure sale will in any event take subject to the senior lien.
If, prior to foreclosure, the debtor sells its interest in the property to a third party prior to foreclosure, such a successor in interest may also redeem.
Redemption after foreclosure
Some states permit a debtor to redeem real property after a judicial foreclosure sale. This is generally referred to as post-sale or statutory redemption. Article 9 does not provide for redemption following judicial foreclosure. In California, the debtor and the debtor's successors in interest, but not junior lienholders, may redeem following judicial foreclosure if the foreclosing creditor was not precluded by law from the recovery of any deficiency. The redemption period is one year if the proceeds of the foreclosure sale are insufficient to satisfy the debt but the period is only three months if the proceeds actually received by the foreclosing creditor were sufficient to satisfy the debt. The foreclosing creditor loses the right to redeem if it has waived the right to a deficiency. See Cal. Code Civ. Pro. 729.010-729.090.
During the period of statutory redemption (i.e. redemption following judicial foreclosure), the debtor, or its successor in interest, retains the right to possession of the property, but the purchaser at the foreclosure sale has the right to collect rents and profits from the debtor's lease of the property and a right to be compensated for the debtor's use and occupation of the property. See Cal. Code Civ. Pro. 729.090. Notwithstanding the right of the purchaser to be compensated for the debtor's use and occupatin of the property, there is apparently no procedure by which the purchaser may evict the debtor who refuses to pay rent!