Executive summary

“Pasalo” (also called “assume balance,” “assume mortgage,” or “assume payments”) is a private arrangement where the current borrower of a car loan lets another person take possession of the vehicle and continue the monthly amortizations. In Philippine law, a pasalo does not, by itself, transfer the loan or release the original borrower from liability unless the lender expressly consents to a proper novation/assumption of debt. Without lender consent, the bank or finance company may repossess the vehicle on default and can pursue the original borrower (and sometimes the “pasalo” buyer) for any deficiency after foreclosure. In some situations, selling or disposing of a mortgaged vehicle without the mortgagee’s consent can expose the parties to criminal liability under the Revised Penal Code (sale/removal of mortgaged property), apart from civil suits.

This article explains the legal foundations, typical liabilities, remedies, and risk-management steps for both sides of a pasalo.

What “pasalo” is—and what it is not

What it is: A private handover of possession and payment responsibility from the registered borrower to a new user/buyer who pays the remaining installments, often coupled with a deed of sale (sometimes “with assumption of mortgage”) and a Special Power of Attorney (SPA) to transact with the lender and the LTO.
What it is not: By default, it is not a transfer of the loan contract or a release of the original borrower from the debt. The lender is not bound by a private pasalo unless it consents in writing (usually through an assumption of loan or novation approval and updated chattel mortgage).

Legal foundations

Civil Code—Obligations & Contracts; Novation/Assumption of Debt
- A change of debtor that discharges the old debtor requires novation with the creditor’s consent.
- Two forms are common:
  - Expromisión: The new debtor is substituted by initiative/with consent of the creditor, releasing the old debtor.
  - Delegación: The old debtor proposes a new debtor, and the creditor accepts, thereby releasing the old debtor.
- No creditor consent ⇒ no release. The original borrower remains fully liable to the lender even if a private deed says otherwise between buyer and seller.
Chattel Mortgage Law & loan/security documents
- Vehicle loans are typically secured by a chattel mortgage over the car.
- The mortgage and the lender’s standard terms usually prohibit transfer or sale without prior written consent. Violation can trigger default, repossession, and acceleration of the entire balance.
Revised Penal Code—Sale or removal of personal property subject to chattel mortgage
- Selling, encumbering, or removing a mortgaged vehicle to the prejudice of the mortgagee and without its consent can constitute a criminal offense (distinct from civil liability). Intent to defraud and the mortgagee’s lack of consent are key elements.
LTO rules on registration and ownership
- LTO’s Certificate of Registration (CR) and Official Receipt (OR) identify the registered owner; changes of ownership require proper documents (deed of sale, release of chattel mortgage if fully paid, or lender’s consent if assumed).
- A pasalo with no lender consent often cannot complete LTO title transfer; the registered owner remains the person on record, with corresponding administrative exposure (e.g., traffic violations initially traced to the registered owner).
Deficiency after foreclosure (chattel mortgage)
- After lawful repossession and sale, if proceeds do not fully cover the outstanding balance plus charges, lenders may sue for the deficiency. Philippine jurisprudence generally allows deficiency claims in chattel mortgage foreclosures (unlike some rules in real estate mortgage under specific foreclosure modes).

Who is liable—and for what?

A. Original borrower (“seller” in pasalo)

To the lender: Remains primarily liable for the loan unless and until the lender approves a formal assumption/novation. The lender can:
- Declare default for unauthorized transfer;
- Repossess the vehicle under contractual and legal remedies;
- Accelerate the debt and pursue the borrower for deficiency after foreclosure;
- Report adverse credit information and take civil (and sometimes criminal) action (e.g., sale/removal of mortgaged property without consent).
To the pasalo buyer: If the buyer keeps paying but the lender refuses to recognize the arrangement, disputes can arise. The buyer may seek damages/rescission against the seller under their private contract, but this does not bind the lender.
Traffic/administrative liabilities: As long as the LTO record stays in the seller’s name, notices may be sent to the seller. Failure to notify the LTO of sale (where applicable) can create hassles and potential exposure until records are updated.

B. Pasalo buyer (“assumer”)

To the lender: Without lender consent, the buyer typically has no privity with the lender—so the lender can repossess without treating the buyer as an approved debtor. If the buyer agreed to be solidarily liable in a lender-approved assumption, the lender can go after the buyer directly.
To the original borrower: The buyer owes what the private pasalo agreement stipulates (e.g., to pay installments on time, safeguard the vehicle, avoid acts that risk repossession). Failure can lead to damages and forfeiture of down payments or deposits.
Criminal exposure: Knowingly participating in the unauthorized sale/transfer/disposal of a mortgaged vehicle, or concealing it to defeat repossession, may create criminal risk. Issuing bounced checks for payments can also trigger liability under B.P. 22.
Possession risks: If the lender repossesses due to default or unauthorized transfer, the buyer may lose the vehicle and risk losing amounts already paid to the seller.

C. Lender/Financing company

May withhold consent to an assumption based on internal credit checks.
On default or breach of “no transfer” clauses, may repossess (peaceably if allowed or via lawful means), foreclose the chattel mortgage, and pursue deficiency and damages.

Common scenarios and outcomes

Pure private pasalo; lender unaware; payments current
- Risk remains high. If discovered, lender may demand cure (seek assumption approval) or call a default. Borrower remains 100% liable.
Private pasalo; buyer defaults
- Lender repossesses; borrower faces accelerated debt and deficiency liability; buyer loses possession and any private payments to the seller unless contract provides otherwise.
Lender-approved assumption/novation
- If properly executed, the new debtor becomes liable; the original borrower is released (in a full novation) or may remain solidarily liable if documents say so. LTO and chattel mortgage records are updated accordingly.
Sale after full loan settlement; mortgage released
- Once the lender issues a Release of Chattel Mortgage and the CR encumbrance is cleared, a regular deed of sale and LTO transfer can proceed—no pasalo issues remain.

Key documents and what they should say

From the lender (for a valid assumption):
- Assumption of Loan / Novation Agreement naming the new debtor, the released debtor (if fully released), and the terms moving forward.
- Updated Chattel Mortgage (or amendment) reflecting the new debtor.
- Written consent to transfer possession and to process LTO changes.
Between seller and buyer (private layer, still subject to lender consent):
- Deed of Sale with Assumption of Mortgage that:
  - Discloses the outstanding balance, interest, penalties, and total cost;
  - States whether the seller is to be fully released (subject to lender approval) or remains solidarily liable;
  - Allocates who pays past-due amounts, penalties, transfer/processing fees;
  - Contains representations & warranties (vehicle condition, no undisclosed violations, no prior sale);
  - Provides default remedies, including forfeiture/refund rules, step-in rights, and obligation to cooperate in lender approval.
- Special Power of Attorney (SPA) so the buyer can handle payments/transactions, if the lender allows pending approval.
For the LTO:
- CR/OR, valid IDs, TIN of both parties, deed(s), Release of Chattel Mortgage or lender consent (if still encumbered), MVIR (if required), and other LTO forms/fees.

Civil and criminal exposure checklist

Civil
- Unpaid amortizations, accelerated balance, deficiency after foreclosure.
- Damages for contract breach between seller and buyer.
- Attorney’s fees, penalties, liquidated damages (if stipulated).
Criminal (selected risks)
- Sale/removal of mortgaged personal property without mortgagee consent, to the latter’s prejudice (Revised Penal Code).
- B.P. 22 for checks issued without sufficient funds.
- Fraud-related offenses in aggravated schemes (e.g., multiple unauthorized re-sales of encumbered vehicles).

Note: Actual criminal liability depends on facts and intent; defenses and thresholds apply.

Practical guidance

If you are the original borrower (seller)

Do not rely on a purely private pasalo. Seek the lender’s written approval for an assumption/novation before handing over keys and papers.
Keep control until approval: retain the CR/OR, spare keys, and keep insurance current with you and the lender as loss payee.
Document payments and require the buyer to pay directly to the lender (official receipts), or use escrow, while approval is pending.
Notify the LTO when appropriate and finalize transfer promptly once the lender okays it.
Guard your credit. Until released, you remain liable; monitor the account and set automatic alerts.

If you are the pasalo buyer

Insist on lender vetting and written consent. Be ready for a credit check; without approval, walk away or structure a conditional arrangement with escrow.
Verify encumbrances: confirm outstanding balance, arrears, penalties, and whether the car is flagged (e.g., for violation/hold).
Avoid paying large amounts upfront before lender approval. If you must, escrow with clear refund triggers.
Insurance & risk: Ensure comprehensive insurance remains in force with correct insureds/loss payee and add you as an authorized driver.
Register promptly after approval; keep copies of all approvals, receipts, and IDs in the glove compartment (and digital copies).

If you are the lender

Provide a clear process for assumptions; require the vehicle’s physical inspection, updated insurance, and verification of both parties’ identities to mitigate fraud.

Frequently asked questions

1) Is a deed of sale with assumption of mortgage enough to release the seller? No. It binds only the seller and buyer. The lender must consent in writing (novation/assumption approval) for the release to be effective against it.

2) Can the lender repossess even if the buyer is current on payments? If the loan documents prohibit unauthorized transfers, the lender can treat the pasalo as a breach and may repossess even if amortizations are current—though some lenders may regularize the arrangement instead of repossessing.

3) Who pays penalties and back dues discovered later? Whatever the parties stipulate—but absent agreement, the lender will charge the account; between buyer and seller it often becomes a dispute, hence the importance of full disclosure and escrow.

4) After foreclosure and sale, can the lender still collect the deficiency? Yes, lenders typically may claim any deficiency remaining after applying sale proceeds and lawful charges in chattel mortgage foreclosures.

5) Is it illegal to sell a mortgaged car? Selling or disposing of a mortgaged car without lender consent and to its prejudice can be a crime, aside from civil default. Consent cures most of that risk.

6) The car remains registered under the seller’s name—what’s the risk? Traffic notices and administrative correspondence may go to the registered owner, and the seller may be inconvenienced or initially implicated in incidents until records are updated.

Contract drafting tips (sample clause ideas)

Condition precedent: “This sale and transfer shall take effect only upon issuance by [Lender] of a Written Assumption Approval naming Buyer as new debtor and acceptance of updated chattel mortgage. If not issued by [date], either party may rescind, with escrow to refund principal less agreed processing costs.”
Allocation of sums: “Buyer shall pay all installments due from [date], and Seller warrants no arrears or undisclosed penalties as of the same date.”
Default & repossession: “If Buyer misses two consecutive payments or violates the no-transfer clause with the Lender, Seller may reclaim possession pending resolution, without prejudice to damages.”
Solidary liability (if required by lender): “Seller and Buyer agree to be solidarily liable to Lender until the latter issues a written release of Seller.”
Cooperation & LTO: “Parties shall execute all LTO and lender documents within 5 business days of request.”

(Use a notary public; attach valid IDs; ensure pages are initialed and exhibits (CR/OR, insurance, photos) are referenced.)

Compliance checklist (for both parties)

Obtain lender’s written consent (assumption/novation).
Update chattel mortgage and insurance endorsements.
Prepare Deed of Sale with Assumption + SPA (if needed), properly notarized.
Verify outstanding balance, arrears, penalties in writing from lender.
Arrange escrow for down payments until approval.
Keep official receipts for all payments (preferably paid direct to lender).
Process LTO transfer/annotation promptly after approval.
Maintain comprehensive insurance with correct loss payee.
Keep copies of all approvals and IDs.

Bottom line

A pasalo only works safely when the lender explicitly agrees to substitute the debtor and updates the chattel mortgage and LTO records. Without that consent, the original borrower remains on the hook, the buyer risks repossession, and both can face civil and even criminal exposure. The best practice is simple: secure lender approval first, structure payments through escrow, keep insurance and records in order, and complete the LTO and mortgage documentation without delay.

This article provides general information and is not a substitute for tailored legal advice. For a specific situation, consult a Philippine lawyer and review your lender’s exact loan and mortgage terms.