Assume-Balance Car Purchases in the Philippines—A Comprehensive Legal Guide

Scope & Purpose This article explains, from end to end, how a Philippine car buyer may “assume the balance” of someone else’s auto-loan. It weaves together statutory law, Bangko Sentral rules, LTO procedures, BIR taxes, and doctrinal principles such as novation and chattel-mortgage law. It is written for laypersons, lawyers, car dealers, and financing institutions. While exhaustive, it is not a substitute for personalized legal advice.

1. What “Assume Balance” Means in Philippine Law

Element	Practical Meaning	Controlling Law / Doctrine
Existing loan	The seller’s car is subject to an unpaid auto-loan secured by a chattel mortgage over the vehicle.	Act No. 1508 (Chattel Mortgage Law); Civil Code Arts. 2088–2141
Assumption	A third party (the buyer) agrees to take over the unpaid installments, thereby extinguishing the seller’s future liability and substituting the buyer in the loan.	Novation under Civil Code Arts. 1291–1300
Transfer of title	Ownership and LTO registration must pass to the buyer, even though the lender keeps the original Certificate of Registration (CR) as mortgagee until full payment.	RA 4136 (Land Transportation & Traffic Code)

Key takeaway: An assume-balance deal is not an ordinary sale; it is a tri-partite novation—seller, buyer, and lender must all agree, otherwise the seller remains solidarily liable.

2. Parties and Their Legal Interests

Party	Essential Consent?	Primary Risks if Consent Withheld
Seller-Borrower	Yes—executes a Deed of Sale with Assumption of Mortgage (DS-AOM).	Loan remains in seller’s name; credit score hit if buyer defaults.
Buyer-Assumer	Yes—signs DS-AOM and lender’s Assumption Agreement; undergoes credit vetting.	No title, no CR transfer, and no insurance claim approval without lender sign-off.
Creditor-Lender (bank / financing company)	Indispensable. Even a notarized DS-AOM is ineffective without lender’s written conformity.	Maintains right to repossess under Chattel Mortgage Law.
Land Transportation Office (LTO)	Needed for registration transfer and issuance of new CR/OR.	Refuses transfer if CR still carries an unpaid mortgage without lender’s release.

3. Step-By-Step Transaction Flow

Pre-Qualification
- Buyer submits standard loan docs (ID, ITR/COE, proof of billing).
- Lender runs a credit check per BSP Circular 1011-18 and the Financing Company Act (RA 8556).
Draft & Notarize the DS-AOM
- Must contain:
  - Full description of vehicle (make, engine/chassis nos., plate, MV file no.).
  - Precise loan balance, monthly amortization, interest rate, and maturity date.
  - Express stipulation that lender’s written conformity is a condition for validity (Civil Code Art. 1318).
Bank Conformity / Contract of Novation
- Lender issues either:
  - Assumption of Mortgage Agreement, or
  - Loan Restructuring Agreement (if interest or term changes).
- Parties sign in the presence of the bank’s notary; bank appends to original loan file.
BIR Documentary Stamp Tax (DST) Filing
- File BIR Form 2000-OT within 5 days of notarization.
- DST rate on chattel mortgage: ₱40 (fixed) plus ₱20 for each ₱5,000 of loan balance above ₱10,000 (Sec. 195, Tax Code) payable by the buyer unless parties agree otherwise.
LTO Registration Transfer
- Submit to the district office:
  - DS-AOM and bank conformity (original & photocopy)
  - Buyer’s ID and TIN
  - Original CR & latest OR (still in seller’s name)
  - Affidavit of Transfer of Ownership
  - CTPL Insurance with buyer as new insured—endorsement letter from insurer
- Pay: ₱50 transfer fee, computer fee, and any arrears.
- LTO annotates “for the account of [buyer]” but retains the lender’s mortgage annotation until loan release.
Insurance Endorsement
- Comprehensive policy: issue an endorsement naming the buyer as registered owner and bank as loss payee.
Loan Servicing
- Buyer makes future payments directly.
- On full payment, lender issues a Release of Chattel Mortgage (RCM), which must be notarized, DST-paid (₱20), and annotated at LTO to secure the final CR without lien.

4. Legal Consequences of Default After Assumption

Repossession: Lender may foreclose the chattel mortgage via public auction (Act 1508, Secs. 14–17).
Solidary Liability: If the lender’s consent was conditional or incomplete, the seller may still be pursued (Civil Code Art. 1207).
Deficiency Claim: After auction, any unpaid balance becomes an unsecured claim; lender may sue buyer (and seller, if still liable) under Civil Code Art. 2141.
Criminal Exposure: Using or withholding CR/OR to defeat repossession can be prosecuted under RA 10883 (New Anti-Carnapping Act).

5. Taxation & Fee Matrix

Stage	Payor (default)	Tax / Fee	Statutory Basis
Notarization	Seller/Buyer	₱400–₱1,200 block rate	2004 Notarial Rules
DST on DS-AOM	Buyer	₱15 for the sale clause	plus schedule on loan balance	NIRC Secs. 179 & 195
DST on RCM (release)	Buyer	₱20 fixed	NIRC Sec. 195
LTO Transfer	Buyer	₱50 + computer fee	DOTr AO 2018-021
Plate Replacement (optional)	Buyer	₱450	LTO AO 2014-39
Mortgage Annotation fee (LTFRB buses/PUVs)	Buyer	₱200	LTFRB MC 2011-007

VAT Note: A casual sale of a used car by a private individual is not subject to VAT. However, if the seller is a VAT-registered dealer, the buyer pays 12 % VAT on the entire selling price or fair-market value, whichever is higher (NIRC Sec. 106 [A]).

6. Consumer & Regulatory Protections

Truth in Lending Act (RA 3765)
- Lender must disclose effective interest rate, finance charges, and penalties even in an assumption.
Personal Property Security Act (RA 11057, 2018)
- New security interests must be recorded in the Personal Property Security Registry (PPSR)—done automatically by banks with electronic filings.
Data Privacy Act (RA 10173)
- Seller’s financial data may only be shared with buyer upon written consent.
BSP Circular 1133-22 (Responsible Lending Practices)
- Caps on penalty interest and mandatory grace periods during calamities.
Consumer Act (RA 7394) Warranties
- Factory warranty and lemon-law remedies (RA 10642) transfer to buyer if still within statutory period.

7. Practical Checklist for Buyers

✔️	Task	Why it Matters
Obtain bank’s payoff quotation (valid within 3–7 days).	Figures in DS-AOM and DST computation.
Inspect LTO Alarm-Status via LTMS portal.	Flags carnapping, pending case, or “for renewal only.”
Verify unpaid traffic violations (MMDA & LGU).	LTO will refuse transfer until settled.
Require original OR/CR on release; photocopies insufficient for PNP-HPG checkpoints.	Proof of ownership.
Take photos of odometer & vehicle condition on signing date.	Protects against warranty disputes.

8. Common Pitfalls and How to Avoid Them

Skipping Lender Consent
- Myth: A notarized DS-AOM automatically binds the bank.
- Reality: Without lender’s written conformity, there is no novation; seller stays on the hook.
Informal “Sulit” or “Facebook” Deals
- Many assume-balance ads omit VAT, DST, or even the true loan balance. Demand the official payoff letter.
Delayed Transfer
- LTO imposes ₱100/month penalty for late ownership transfer beyond 30 days from sale (AO 2021-039).
Using a “Special Power of Attorney” Instead of DS-AOM
- An SPA only authorizes payment; it does not transfer ownership or liability.
Unendorsed Insurance
- Accident claims are denied if policy still names the seller as owner.

9. Special Situations

Scenario	Additional Requirement
Corporate Seller	Board Resolution & Secretary’s Certificate; SEC clearance if encumbered asset exceeds 10 % of total assets (Corp. Code Sec. 41).
OFW Buyer	Consularized SPA to sign domestically; bank may require personal appearance upon release.
PUV / TNVS Unit	LTFRB approval of franchise transfer before LTO will annotate new operator.
Estate Sale	Extra-judicial settlement and BIR eCAR on estate tax before DS-AOM.

10. Summary of Governing Statutes & Regulations

Civil Code Arts. 1179-1300, 1625-1635, 2088-2141 (sale, novation, assignment, pledge/mortgage)
Chattel Mortgage Law (Act 1508)
RA 4136 & DOTR/LTO Administrative Orders (motor-vehicle registration)
National Internal Revenue Code (DST, VAT)
RA 8556 (Financing Company Act) & BSP Circulars on credit underwriting
RA 3765 (Truth in Lending Act)
RA 7394 (Consumer Act) & RA 10642 (Philippine Lemon Law)
RA 11057 (Personal Property Security Act)
RA 10173 (Data Privacy Act)
RA 10883 (New Anti-Carnapping Act)

Final Word

Assuming the balance of a car loan can be a cost-effective path to vehicle ownership, but only when the legal mechanics—novated debt, chattel-mortgage annotation, tax compliance, and LTO registration—are scrupulously observed. Always secure the lender’s written conformity, pay the correct Documentary Stamp Taxes on time, and update both LTO and insurance records without delay. When in doubt, consult a lawyer or accredited dealer to safeguard both the seller’s release and the buyer’s rights.