In the Philippines, the term "Pasalo" has become a staple in the secondary automotive market. It refers to a transaction where a vehicle owner (the seller) transfers their rights and obligations over a mortgaged vehicle to a buyer, who then assumes the remaining monthly amortizations.

While it appears to be a "win-win" for a seller struggling with payments and a buyer looking for a cheaper entry point into car ownership, the legal reality is fraught with significant risks. Under Philippine law, these transactions often sit on a razor's edge between a valid contract and a criminal act.

The Legal Foundation: The Chattel Mortgage Act

Most vehicles in the Philippines are purchased through bank financing, secured by a Chattel Mortgage. Under the Chattel Mortgage Law (Act No. 1508) and the Civil Code, the bank (the mortgagee) holds a recorded lien on the vehicle.

The most critical provision to understand is Article 319 of the Revised Penal Code, which governs the "Removal, Sale, or Pledging of Mortgaged Property."

1. The Requirement of Consent

By law, a mortgagor (the seller) cannot sell or pledge personal property already mortgaged without the written consent of the mortgagee (the bank/financing institution).

Legal Consequence: Selling a vehicle under mortgage without the bank's written permission is a criminal offense. It can lead to charges of Estafa or a violation of the Chattel Mortgage Law, punishable by fine or imprisonment.

2. The "Deed of Sale with Assumption of Mortgage"

In a "Pasalo" setup, parties usually execute a Deed of Sale with Assumption of Mortgage. While this document is binding between the buyer and the seller, it is generally not binding on the bank unless the bank was a party to the agreement.

[!IMPORTANT] Without the bank’s "Letter of Approval" or formal novation, the original owner remains legally liable for the debt, and the bank does not recognize the buyer as the new owner.

Risks for the Buyer

Buying a "Pasalo" vehicle without bank intervention is a high-risk gamble.

No Legal Title: The buyer cannot register the vehicle in their name with the Land Transportation Office (LTO) because the original Certificate of Registration (CR) is held by the bank.
Risk of Repossession: If the original owner has other unpaid debts or if the bank discovers the unauthorized transfer, the bank can exercise its right to foreclose and repossess the vehicle, regardless of who is currently driving it.
Encumbrance Records: The LTO keeps a record of the mortgage. Any transfer of ownership will be blocked until a "Cancellation of Chattel Mortgage" is issued by the bank—which only happens once the loan is fully paid.

Risks for the Seller

Sellers often use "Pasalo" to escape a debt they can no longer afford, but the legal ties are not easily severed.

Continuing Liability: If the buyer stops paying the monthly amortizations, the bank will sue the original borrower, not the buyer. The seller’s credit score will be ruined, and they may face civil suits for the deficiency balance.
Criminal Liability: As mentioned, transferring the vehicle without the bank's consent exposes the seller to criminal prosecution under the Revised Penal Code.
Vicarious Liability: If the buyer gets into a vehicular accident, the registered owner (the seller) can still be held liable for damages under the Registered Owner Rule in Philippine jurisprudence.

The Proper Legal Procedure

To ensure the "Pasalo" is legally sound and protects both parties, the following steps must be taken:

Bank Notification: Inform the financing bank of the intent to transfer the mortgage.
Credit Evaluation: The bank will treat the buyer as a new loan applicant. The buyer must submit income documents and undergo a credit check.
Novation of Contract: If approved, the bank will facilitate a Novation, where the original loan contract is canceled and a new one is created in the buyer's name.
Updated Registration: Once the bank approves the transfer, the LTO records can eventually be updated to reflect the change in ownership (subject to the mortgage).

Summary Table: Private vs. Bank-Approved Pasalo

Feature	Private "Pasalo" (Unapproved)	Bank-Approved Assumption
Legality	Risk of Criminal Charges (Art. 319 RPC)	Fully Legal and Recognized
Liability	Seller remains liable for defaults	Buyer becomes the sole debtor
Registration	Remains in Seller's name	Transferable to Buyer
Safety	High risk of "Talon" (scams)	Secure and documented