Legal Definitions - redeem

The term redeem has distinct meanings depending on the legal context, primarily appearing in bankruptcy, securities law, and real property law. In each case, it generally refers to an act of recovery or repayment.

• In bankruptcy law, to redeem means that a debtor has the right to repurchase certain personal property that was previously owned by them but is now subject to a creditor's lien. This allows the debtor to keep the property by paying the creditor the full amount of the secured debt, even if the property's market value is higher. This option is typically available for tangible personal property intended for personal, family, or household use.

  • Example 1: Sarah files for bankruptcy, and her primary vehicle, a used car, has an outstanding loan secured by a lien. To keep her car, Sarah chooses to redeem it. She pays the auto lender the remaining balance of the car loan in a lump sum, thereby removing the lien and retaining full ownership of the vehicle.

    Explanation: This illustrates Sarah exercising her right as a debtor in bankruptcy to pay off a secured debt on personal property (her car) to prevent the creditor from repossessing it, allowing her to keep the asset.

  • Example 2: Mark declares bankruptcy, and a valuable collection of antique tools, which he uses for his hobby, is subject to a lien from a small personal loan. Mark wants to keep his tools. He decides to redeem the tools by paying the lender the full amount of the outstanding loan that the tools secured.

    Explanation: Here, Mark uses the redemption process to pay off the lien on his personal property (antique tools) to ensure he retains ownership, rather than allowing the creditor to take them.

• In securities law, to redeem refers to the act by which an issuer (such as a corporation or government) repays a fixed-income security, like a bond, to its holder. This repayment can occur at the security's maturity date or, if the terms allow, at an earlier date. When a security is redeemed, the issuer pays the principal amount (and sometimes a premium) to the holder, thereby fulfilling its obligation and retiring the security.

  • Example 1: The City of Evergreen issues municipal bonds to finance a new public library, with a maturity date of 20 years. Five years later, due to unexpected tax revenue surpluses, the city council decides to exercise a "call option" embedded in the bonds, allowing them to redeem a portion of the bonds early. They pay the bondholders the principal amount plus a small premium, effectively buying back the bonds before their scheduled maturity.

    Explanation: This demonstrates the city, as the issuer, repaying its bondholders ahead of schedule, thus retiring the debt and ending its obligation to pay future interest.

  • Example 2: A technology company issues preferred stock that includes a provision allowing the company to buy back the shares at a set price after a certain period. When the company's financial position improves significantly, its board decides to redeem these preferred shares. They pay the specified redemption price to the preferred shareholders, converting the shares back into cash and reducing the company's dividend obligations.

    Explanation: In this scenario, the company is repaying its investors by buying back the preferred stock, fulfilling its obligation under the terms of the security.

• In real property law, to redeem means that a debtor who has defaulted on a mortgage and whose property has been foreclosed upon can regain ownership of that property. This is typically done by paying the full amount of the defaulted debt, including interest, fees, and foreclosure costs, within a specific period after the foreclosure sale. This right, known as the "right of redemption," is often established by state law.

  • Example 1: After losing his job, David defaults on his home mortgage, and his house is subsequently foreclosed and sold at auction. However, the state where David lives grants a six-month statutory right of redemption. Within this period, David secures a new loan from a family member and pays the full amount owed, including the original debt, interest, and all foreclosure costs, to the party who purchased the house at auction. By doing so, David successfully redeems his property and regains ownership.

    Explanation: David exercises his legal right to reclaim his foreclosed home by paying off the entire debt and associated costs within the allowed timeframe.

  • Example 2: A small commercial building owned by a local business goes into foreclosure due to missed loan payments. The property is sold at a sheriff's auction. The business owner, determined to save their livelihood, works diligently and, within the one-year redemption period allowed by state law, manages to gather sufficient funds to redeem the property from the auction buyer. They pay the full amount of the original debt, plus all accrued interest and fees, to reclaim the building.

    Explanation: This illustrates the business owner utilizing the right of redemption to recover their commercial property after a foreclosure sale by settling the outstanding financial obligations.