Liability in Loan Assumption Agreements under Philippine Law

This article is meant for scholarly/educational purposes and is not a substitute for specific legal advice. Statutes, regulations and jurisprudence cited are current up to 7 May 2025.

1. Concept and Business Context

A loan assumption agreement is a three-cornered arrangement in which a person who is not the original debtor undertakes to pay an existing loan, usually in order to acquire the encumbered property or business. In Philippine practice the device is common in:

the sale of mortgaged subdivision houses or condominium units;
corporate asset purchases (e.g., buyer “assumes” bank indebtedness of target);
intra-family transfers of land with outstanding bank loans;
refinancing transactions where a new lender pays off the original lender but keeps the collateral.

Legally, the agreement re-configures the original credit relationship. The centerpiece is Article 1291 of the Civil Code: obligations may be modified or extinguished “by novation.”

2. Novation as the Governing Doctrine

Element	Requirement for valid novation
(1) A prior valid obligation	Existing loan must itself be enforceable when novation is attempted.
(2) Agreement of the parties	Intention (“animus novandi”) must be clear and unequivocal; it is never presumed (Art. 1292).
(3) Material change	A change of debtor is a subjective novation (Art. 1291, par. 2).
(4) Capacity and compliance with form	Where real-estate security is involved, the deed must be in a public instrument and registered to bind third persons (Arts. 1358, 1625, 2125).

Two species of subjective novation are recognized:

	Expromisión (expromision)	Delegación (delegation)
Initiative	New debtor himself offers to assume.	Old debtor proposes the substitution.
When creditor’s consent is given	Upon acceptance of new debtor by creditor.	Upon acceptance of new debtor and the delegation by creditor.
Effect on original debtor	Released from liability the moment creditor accepts, even without his own consent.	Released only if the creditor expressly discharges him.
Example case	Montevirgin v. CA, G.R. L-63710 (14 Jan 1985).	Phil. National Bank v. CA, G.R. 126152 (16 Jun 2000).

3. Consent of the Creditor: the Pivotal Step

Until consent is given, any agreement between original debtor (“D1”) and assuming debtor (“D2”) is res inter alios acta vis-à-vis the creditor (“C”). D1 remains solely liable, and D2’s promise is enforceable only between D1 and D2 (Arts. 1311, 1312).
Once C accepts the substitution, liabilities shift in accordance with the type of novation:
- In expromision C can sue only D2; D1 is fully discharged.
- In delegation C may preserve recourse against D1 unless the instrument or surrounding circumstances show an intent to release him.
Creditor’s consent may be express (e.g., bank issues an approval letter) or implied (e.g., bank accepts payments from D2 and executes a new promissory note). Courts look for “acts amounting to ratification” but demand clear and unmistakable evidence (BPI Family Bank v. Yu, G.R. 230443, 31 Jul 2017).

4. Continuing or Residual Liability of the Original Debtor

No creditor consent → D1 remains the sole debtor.
Expromisión with consent → D1 has zero direct liability to C but gains a right of reimbursement against D2 if he later pays the debt (subrogation, Art. 1303).
Delegación with consent but without release clause → Solidarity between D1 and D2 is implied (Art. 1207).
Delegación + creditor’s release (“liberatory delegation”) → D1 is entirely discharged.

Collateral mortgages and guarantees. Under Art. 1293, securities furnished by third persons (e.g., sureties) subsist unless the surety/guarantor consents to the novation. For bank loans, the mortgage generally follows the debt; thus, the property remains bound despite substitution of the debtor (Art. 2085).

5. Documentation and Registration Requirements

Instrument	Statutory basis	Practical notes
Deed of Assumption/Novation (public instrument)	Arts. 1358 & 1625 Civil Code; Sec. 112, Property Registration Decree	Must describe the loan, the collateral, and the parties’ intent to substitute debtor.
Amendment to Real Estate Mortgage (REM)	Art. 2125 & Sec. 60, P.D. 1529	Needed if debtor’s name on mortgage inscription is to be changed.
Transfer Certificate of Title (annotation)	Sec. 71, P.D. 1529	“Entry” of the assumption & amended mortgage to protect D2 and inform third parties.
For condo units / subdivision lots	P.D. 957 & its IRR	Developer’s written consent if still the registered owner; HLURB approval required in some cases.

Failure to register makes the novation unenforceable against third persons (e.g., a subsequent innocent purchaser) though it remains binding inter partes.

6. Tax Implications of Assuming a Loan

Tax	Effect of assumption
Capital Gains Tax (CGT) on sale of real property (6 %)	Under BIR Rev. Regs. 13-99, the “gross selling price” is the higher of (a) consideration actually received + assumed debt, or (b) zonal value.
Documentary Stamp Tax (DST)	The new promissory note or amendment to REM is subject to DST based on the principal amount outstanding.
Value-Added Tax (VAT) on sale of real property by a VAT-registered seller	VAT base includes any loan balance assumed by the buyer (Sec. 106, NIRC).
Donor’s Tax	If loan is assumed without adequate consideration (e.g., parents transfer land to child and child takes over small debt), BIR may treat the “bargain element” as a gift.

7. Treatment under Special Laws

Maceda Law (RA 6552). For in-house installment buyers of subdivision lots or condos, a developer cannot compel assumption of bank loans unless the buyer has been properly notified and has given written conformity. Otherwise, the buyer may rescind and recover cash surrender value.
Home Development Mutual Fund (Pag-IBIG) circulars allow “loan assumption” subject to borrower eligibility, updated taxes, and loan-to-value limits.
Banking regulations. Bangko Sentral ng Pilipinas (BSP) Manual of Regulations for Banks (MORB) treats the substitution as a “loan restructuring”; the bank must re-underwrite the new debtor and, if corporate, evaluate single-borrower limits.

8. Representative Philippine Jurisprudence

Case	Gist / Doctrine
Montevirgin v. Court of Appeals, 139 SCRA 198 (1985)	Bank’s acceptance of payments and execution of a new promissory note with the assuming buyer constituted expromision; original mortgagor fully discharged.
Phil. National Bank v. Court of Appeals, 333 SCRA 420 (2000)	In a delegation, the original debtor remained liable because the bank did not expressly release him; “novation is never presumed.”
Rural Bank of Davao City v. CA, G.R. 42864 (10 Dec 1987)	Mere notation on deed of sale that buyer “assumes mortgage” is ineffective without mortgagee-bank consent.
BPI Family Bank v. Spouses Yu, G.R. 230443 (31 Jul 2017)	Continued acceptance of amortizations from assuming debtor without formal approval letter did amount to tacit consent; deficiency after foreclosure could be collected only from the assuming debtor.
Spouses Abaya v. Ebdane, G.R. 167722 (20 Apr 2007)	Buyer who assumed PAG-IBIG loan but failed to secure Fund’s approval remained personally liable to the seller for unpaid balance; seller could still be pursued by the Fund.

These rulings repeatedly stress: clear creditor consent and explicit terms in the assumption instrument are indispensable to shift or extinguish liability.

9. Liability After Foreclosure or Dacion en Pago

If the security is foreclosed and sale proceeds are insufficient, the debtor(s) remain personally liable unless the REM contains a non-recourse stipulation (Art. 2130). An assuming debtor is liable for the deficiency to the extent he bound himself.
A dación en pago (delivery of property to creditor in payment) extinguishes the loan only up to the property’s agreed value (Arts. 1245, 1628). If dation is executed before novation, the loan disappears and there is nothing left to assume.

10. Practical Tips for the Contract Drafter / Transacting Public

Spell out the type of substitution. Insert a clause: “This constitutes a liberatory expromision, fully releasing the Original Debtor upon Bank’s countersignature.”
Secure written bank approval first; many banks prescribe their own “Assumption of Loan” forms and charge processing fees.
Amend the mortgage and cause annotation on the title—especially critical if the land will later be used as collateral for a second loan.
Check tax consequences early; the assumed debt increases both CGT and DST.
Verify insurance policies. Fire or MRI (mortgage redemption insurance) on the collateral must name the new debtor as insured and the bank as beneficiary.
Guarantees and sureties: obtain express waivers or new guarantees as needed; sureties can be discharged by material alteration without their consent.
Consider alternative structures:
- Loan take-out (new loan from different bank pays old loan) may be cleaner.
- Subrogation where buyer pays loan in full and is subrogated to creditor’s rights, avoiding creditor-consent hurdle.

11. Summary of Liability Rules

No creditor consent → Only original debtor liable.
Expromision (with consent) → Only assuming debtor liable; original debtor discharged.
Delegación (with consent, no release) → Assuming and original debtors solidarily liable.
Delegación with express release → Assumee only.
Non-release of sureties/mortgagors unless they consent.
Collateral remains despite substitution until loan is fully paid or mortgage cancelled.
Deficiency after foreclosure follows the party/ies still liable per the foregoing rules.

12. Conclusion

In the Philippine setting, a loan assumption agreement is not a mere private arrangement between buyer and seller; it re-shapes three distinct legal relationships—between debtor & creditor, debtor & assignee, and creditor & assignee. The creditor’s clear, informed consent is the turning key that either transfers, splits, or extinguishes liability. Because failure to satisfy statutory formalities or obtain bank approval can leave the original debtor unexpectedly on the hook (or worse, create double liability), careful drafting, tax planning, and registration are essential. Parties who understand and respect the Civil Code’s novation framework—and the overlay of mortgage, tax, and special housing laws—can confidently use loan assumptions as a flexible financing tool while staying on the right side of Philippine law.