Selling a mortgaged car in the Philippines raises a mix of civil, criminal, and practical consequences that many people don’t fully appreciate—especially in common “pasalo” / assume balance arrangements. This article walks through the key legal rules, risks, and typical scenarios in Philippine law.

1. What is a “mortgaged car”?

In Philippine practice, a “mortgaged car” usually means:

The car was bought through a loan (often from a bank or financing company);
The loan is secured by a chattel mortgage over the motor vehicle;
The chattel mortgage is registered with the Registry of Deeds and reflected in the car’s records with the LTO.

A chattel mortgage is a contract where movable property (like a car) is given as security for the performance of an obligation (usually the loan). The debtor keeps possession of the car, but the creditor has a real right over it as security.

Key points:

The ownership of the car is technically with the debtor (borrower), but it is encumbered in favor of the creditor (bank/finance company).
Because of the security interest, the debtor can’t freely dispose of the car as if it were unencumbered—third persons are bound by the mortgage if it is properly registered.

2. Can you legally sell a mortgaged car?

2.1 In principle: yes, with proper consent

Philippine law does not absolutely prohibit the owner from selling mortgaged personal property. However:

The sale must respect the rights of the mortgagee (the bank/financing company).
The chattel mortgage contract often prohibits sale or transfer without written consent of the mortgagee.
The Chattel Mortgage Law and the Revised Penal Code (Article 319) impose liability if the mortgaged property is sold without the mortgagee’s consent in the manner required by law.

So, technically:

With the mortgagee’s valid written consent and proper documentation (often including assumption-of-loan and annotation on the mortgage), selling can be lawful and safe.
Without that consent, the sale is legally risky and can give rise to criminal liability.

2.2 Between seller and buyer vs. as against the mortgagee

Even if the seller and buyer sign a deed of sale:

As between seller and buyer, a contract of sale can be valid (they can bind each other).
But as against the mortgagee, the mortgage still attaches to the car; the buyer acquires it subject to the chattel mortgage.

Result: the bank can still foreclose or repossess the car even from the buyer, if the loan is not paid.

3. Civil consequences of selling a mortgaged car

3.1 Breach of contract with the bank/financing company

Most loan and chattel mortgage contracts contain:

A prohibition against selling, transferring, or otherwise disposing of the car without the bank’s written consent.
Acceleration clauses – if you breach any condition (like unauthorized sale), the entire unpaid balance becomes immediately due and demandable.

If you sell the mortgaged vehicle without consent:

The bank can declare the borrower in default.
The bank can demand full payment of the outstanding loan.
If the borrower fails to pay, the bank can proceed to foreclosure and repossession of the car.

3.2 Foreclosure and repossession

Under the Chattel Mortgage Law:

On default, the mortgagee has the right to foreclose the mortgage, usually by public auction of the car.
The proceeds are applied to the loan balance and costs.
If there is a deficiency (sale proceeds less than balance), the debtor is usually still liable to pay the deficiency (unless the contract or specific laws/jurisprudence say otherwise in certain contexts).

If the car has already been sold to a third party buyer:

The bank can proceed against the car itself, wherever it may be, since the mortgage is a real right attached to the property.
The buyer may suffer loss of the car and may then try to pursue the seller for breach of their contract of sale.

3.3 Liability to the buyer: breach of warranties

In a normal sale, the seller implicitly warrants:

Legal title & peaceful possession – that the buyer will not be disturbed by third party claims;
Freedom from encumbrances – unless the encumbrance is disclosed or expressly assumed.

If the seller conceals the chattel mortgage, or falsely represents that the car is “clean” or “fully paid”:

The buyer can sue the seller for breach of warranty, rescission, damages, or refund.
If fraud is involved (e.g., intentional misrepresentation), this may also be the basis for criminal liability.

4. Criminal consequences: Article 319 (sale of mortgaged property) and related offenses

4.1 Article 319 of the Revised Penal Code

Article 319 of the Revised Penal Code penalizes:

Anyone who, knowing that personal property is encumbered by a chattel mortgage, sells, pledges or otherwise disposes of it without the consent of the mortgagee, given in writing and noted on the mortgage and its records.

Key elements:

There is a valid chattel mortgage over the car.
The accused knows of this mortgage (usually the debtor/mortgagor).
The accused sells, pledges, or encumbers the car, or otherwise disposes of it.
The mortgagee has not given written consent in the form required by law (usually endorsed/annotated).

If these elements are present, the seller can be prosecuted under Article 319, which carries penalties of imprisonment and/or fine.

Important notes:

Intent to defraud is not always required in the same way as in estafa; the law punishes the act of disposition without consent because it prejudices the mortgagee’s security.
Good-faith or ignorance of law is generally not a defense if the seller knew of the mortgage and still disposed of the vehicle without the required consent.

4.2 Estafa and other fraud-related offenses

In some situations, especially where there is deceit or misappropriation, the seller may also be liable for:

Estafa (swindling) – for example:
- Selling the car to a buyer while falsely representing it as unencumbered;
- Receiving payment and then disappearing or refusing to deliver the car or the documents;
- Using the car as collateral multiple times or mortgaging/selling the same car to several people.

Depending on the facts, prosecutors may choose between, or even combine:

Article 319 (special offense relating to mortgaged property), and/or
Certain forms of estafa under Article 315 of the Revised Penal Code.

4.3 Possible involvement of anti-carnapping laws

If the sale involves:

A car obtained through fraud, fake documents, or
A car that was already stolen or unlawfully taken,

then the Anti-Carnapping Act may come into play in addition to the mortgage issue. That’s more extreme and usually beyond the typical “assume balance” situation, but it does happen in complex scams.

5. Consequences for the buyer of a mortgaged car

Many buyers think that if they are in good faith, the bank “cannot touch” the car. That’s wrong in the context of a valid, registered chattel mortgage.

5.1 Buyer is bound by the registered mortgage

Because the chattel mortgage is registered:

It serves as public notice that the car is encumbered.
A buyer is deemed to have constructive notice of the mortgage, even if they did not actually check.

So even a buyer in good faith may:

Lose the car to repossession or foreclosure if the original debtor fails to pay;
Have to chase the seller for refund or damages.

5.2 Difficulty in transferring ownership

At the LTO, the recorded owner and any encumbrances (e.g., in favor of a bank) can be seen. Without proper documentation:

Transfer of ownership to the buyer may be rejected or delayed.
The car may remain registered in the name of the original debtor / previous owner, creating complications (liability for traffic violations, etc.).

5.3 Exposure to criminal complaints

Although the primary criminal liability generally rests on the seller (the mortgagor), buyers can also get entangled in:

Investigations, especially if there are signs that they were in collusion with the seller;
Allegations of receiving stolen or fraudulently encumbered property, depending on the circumstances.

In many cases, even if the buyer is ultimately cleared, the process itself (complaints, investigations, need for a lawyer) can be costly and stressful.

6. “Assume balance” / “pasalo” arrangements

These are very common in the Philippines:

The buyer pays the seller some amount (often to reimburse previous installments), then “assumes” the remaining balance of the car loan and continues paying monthly amortizations.

There are two very different situations here:

6.1 With bank/financing company consent (proper assumption)

In a proper assume-balance transaction:

The buyer applies with the bank/financing company;
The bank performs credit evaluation on the buyer;
If approved, the bank executes:
- A novation or assumption of obligation agreement;
- Updates the chattel mortgage and LTO records (eventually transferring ownership to the buyer);
The original debtor is either:
- Released from the loan and mortgage (if full novation); or
- Remains jointly liable (depending on terms).

When done correctly, this is legal and relatively safe.

6.2 Without bank consent (informal “pasalo” only)

In an informal assume-balance setup (no bank consent):

The loan remains in the name of the original debtor.
The car remains encumbered to the bank under the original chattel mortgage.
The buyer just pays the debtor or directly pays the bank as a “third party payer.”

Problems:

If the debtor stops cooperating, the bank will run after the debtor, not the buyer.
The bank may repossess the car if payments stop or terms are violated (e.g., unauthorized sale).
The buyer may not be able to transfer the car to their name.
The seller may be exposed to Article 319 and other liabilities for disposing of mortgaged property without consent.

Buyers often discover the risk only when:

The bank repossesses the car; or
They attempt LTO transfer and the bank refuses to issue clearance or release documents.

7. How banks and financing companies typically respond

When a bank or financing company discovers that a mortgaged vehicle was sold or transferred without consent, they may:

Declare default and accelerate the loan.
Send demand letters requiring:
- Immediate surrender of the car; and/or
- Full payment of the outstanding loan plus charges.
Initiate repossession, sometimes using:
- Repossession agents; and/or
- Court processes such as replevin (a court action to recover possession of personal property).
Proceed to extrajudicial foreclosure of the chattel mortgage.
File a criminal complaint for:
- Violation of Article 319;
- Possibly estafa or other related offenses.

The exact strategy depends on:

Bank’s policies;
The amount involved;
Cooperation (or lack thereof) from the debtor and buyer.

8. Defenses and mitigating factors (from the perspective of the seller)

If a seller is accused of illegal sale of a mortgaged car, some issues that may arise in defense (though success depends on facts and court evaluation) include:

Lack of knowledge of the mortgage (rare, since the mortgagor is usually the debtor).
Existence of consent:
- Claiming that the bank consented (e.g., verbally, or via email) and the failure to annotate was due to bank or third-party oversight.
Full payment of the loan before the sale:
- If the loan was actually fully paid but the release/annotation was delayed or mishandled.
Good faith belief that the mortgage was already effectively lifted.
Procedural issues:
- Questions about the validity or registration of the chattel mortgage;
- Defects in complaint, evidence, or identification of the accused.

However, these are fact-intensive and typically require professional legal handling.

9. Practical tips and best practices

9.1 For owners (sellers) of mortgaged cars

Never sell or transfer the car without bank consent if it is still mortgaged.
If you intend to sell:
1. Talk to the bank or financing company first.
2. Explore:
  - Full payoff of the loan (so you can sell it “clean”); or
  - A formal assume balance process with the buyer, approved by the bank.
3. Make sure any consent is:
  - In writing; and
  - Properly annotated on the chattel mortgage and relevant records.
Avoid informal “pasalo” agreements where the only document is a private deed of sale and the bank knows nothing.
Understand that “everyone does it” is not a legal defense.

9.2 For buyers of used cars

Always check if the vehicle is encumbered:
- Look at the OR/CR (Original Certificate of Registration): it often shows if there is an encumbrance.
- Ask for the release of chattel mortgage if the seller claims it’s fully paid.
Be careful with deals that:
- Have unusually low prices;
- Require you to just “continue the monthly payment, no need to talk to the bank.”
Ideally:
- Insist that the seller settle the loan first or
- Work out a formal assume-balance transaction with the bank.
Remember that a deed of sale alone does not erase the bank’s mortgage.

10. Summary

In the Philippine context, selling a mortgaged car is not a trivial or purely private matter between seller and buyer. When a vehicle is covered by a chattel mortgage:

The mortgagee (bank/financing company) has real rights over the car;
Unauthorized sale can result in:
- Civil consequences – default, foreclosure, repossession, deficiency claims, and liability to the buyer;
- Criminal consequences – particularly under Article 319 of the Revised Penal Code (sale or encumbrance of mortgaged property without consent), and in some cases estafa or other offenses;
- Serious practical complications for both seller and buyer (loss of car, lawsuits, criminal complaints, and financial loss).

The legally safer path is always:

Full transparency,
Written and properly annotated consent of the mortgagee, and
Formal arrangements (such as bank-approved assumption of mortgage or full payment followed by release of the mortgage) before any transfer.

Important note: This article provides general legal information based on Philippine law concepts and common practices. It is not a substitute for personalized legal advice. Specific cases can turn on small factual details and updated jurisprudence, so anyone facing an actual dispute or considering a risky transaction should consult a Philippine lawyer for tailored guidance.