Understanding the ‘Pasalo’ Scheme: Risks and Legal Guidelines for Buyers and Sellers
“Pasalo” is a Filipino term that refers to the practice of one individual (the original debtor) transferring ownership of a financed asset, like a car or real estate, to another person (the new debtor) before the loan is fully paid off in favor of the creditor. Pasalo can apply to various financed assets such as:
- Real Estate Pasalo: Transferring ownership of a property, such as a house or condominium, before the mortgage with the bank or other financial institution is fully paid off;
- Vehicle Pasalo: Transferring ownership of a financed car or motorcycle to another individual who will continue the remaining loan payments in favor of the bank or other financial institution;
- Gadget Pasalo: Transferring ownership of financed gadgets or electronics, such as smartphones, tablets, or laptops, with the new owner taking over the installment payments in favor of the bank or other financial institutions; and,
- Business Pasalo: Transferring ownership of a business or a business loan, where the new owner assumes the remaining financial obligations.
In a nutshell, pasalo necessarily requires the new owner or, as mentioned, the new debtor to assume the responsibility of the original debtor for the remaining payments in a previously executed agreement, i.e. mortgage. This type of arrangement can be beneficial for the original debtor who wants to get out of the loan obligation and substitute himself with the new debtor who, in turn, accepts such obligation as his own moving forward.
However, if you’re the new debtor who finds such deal too good to be true, that is because, more often than not, there are hidden terms in these kind of arrangements that one should be wary about.
Applicable Law on Pasalo
In reality, the bank or other financial institution (creditor) only approved the loan in favor of the original debtor after conducting a background investigation to determine the latter’s capacity to pay the loan obligation to cover the financed asset. As such, the creditor only transacts with the original debtor. However, in pasalo agreements, considering that a new debtor would take the place of the orginal debtor, the identities of the parties to the original mortgaged contract, for example, will naturally change. Under the Civil Code, this is the concept of novation.
What is important to remember here is that novation may be made even without the knowledge or against the will of the original debtor, but not without the consent of the creditor.
Bearing this in mind, in pasalo agreements, while indeed the new debtor may substitute himself to cover the remaining payments incurred by the original debtor, the bank or the financial institution (creditor) that granted the loan in favor of the original must be notified of such change and, more importantly, must consent to such substitution.
The indispensability of the creditor’s consent to the novation is important, if not indispensable, given that, in the creditor’s perspective, the person with whom they transacted was the original debtor and not the new debtor. Hence, the creditor should agree to accept the substitution in order that it may be binding on him. This is precisely to avoid the situation where, in the mind of the original debtor, he has already transferred the obligation to the new debtor but, in view of the latter’s default in making the succeeding payments, the creditor still pursues its collection from the original debtor. Thus, while the possession of the financed asset may be in the hands already of the new debtor, the creditor can still demand payment from the original debtor since the creditor was unaware of the transfer or did not consent thereto. This scenario, thus, places the original debtor in a disadvantageous position since he will still be required to pay the remaining balance where the financed asset is no longer being enjoyed by him.
All told, some good practices should be kept in mind before engaging in a pasalo transaction, such as, but not limited to the following:
- Ensuring the bank or lender’s approval for the transfer of ownership and assumption of the remaining balance of the loan agreement;
- Due diligence by the new buyer over the property/ies, loan balances, and any outstanding fees or penalties, in relation to the pasalo transactions;
- Clear agreement between the new and original debtors, outlining the terms of the transfer, including the responsibilities of both parties; and,
- Verification of documents, legal assistance, notarization, and payment arrangements.
Technical Carnapping in Relation to
Assume-Balance Scheme
In 2021, the Philippine National Police-Highway Patrol Group (PNP-HPG) warned Filipinos anew to be wary of emerging “technical carnapping” in the country wherein glib-tongued suspects use their wit to steal a motor vehicle from its registered owner without brandishing guns or knives to intimidate their victims.
According to PNP-HPG, “technical car thieves” are using five different ways to swindle their targets and acquire precious motor vehicles, specifically under bank financing, and later reselling them to either witting or unwitting buyer. Among the so-called modern car theft schemes are the “Assume-Balance known as Pasalo-Benta” and “Pasalo-Benta-Bawi”.[1]
- Under the ‘Assume-Balance Scam or the ‘Pasalo-Benta’ Scheme,’ the car thief poses as a buyer of an encumbered motor vehicle and will promise his target (usually the original debtor) that he/she will continue paying for the car or SUV’s monthly amortization to the bank or the financial institution. While the down payment and the monthly amortizations already paid are usually reimbursed to the vehicle owner to gain his/her trust and confidence, the suspect really has no intention of paying the remaining amortizations and will dispose of the vehicle to gain profit.
- Under the ‘Pasalo-Benta-Bawi’ scheme, the suspect will secretly install a Global Positioning Satellite (“GPS”) tracker system in his motor vehicle which he will sell to another person thru the above-named scheme. In most cases, these vehicles are being kept in huge parking lots of posh casinos in Metro Manila where they are being offered for sale to moneyed players. Once a target bites his offer, the suspect will then report to the police that he is a victim of an ‘Assume-Balance Scam’ and file a case against the unsuspecting buyer. With the help of the GPS tracker, the suspect will be able to reclaim the vehicle from the buyer.
Because of these fraudulent schemes, the Bangko Sentral ng Pilipinas (“BSP”) issued Memorandum No. M-2021-047 addressed to all BSP-Supervised Financial Institution (“BSFI”), advising them on the Modus Operandi of Organized Crime Groups through Auto Loans.
In the said Memorandum, BSP essentially warned car buyers and sellers since these transactions necessarily involves auto loan programs from the affiliated banks. Thus, BSP advised BSFIs to observe and strengthen the conduct of, among others, customer identification and verification procedures as part of the Customer Due Diligence, as well as strict implementation of anti-money laundering measures.
Fast forward in August of 2024, a notorious carnapper was arrested in Tondo Manila, pursuant to the warrant of arrest issued against her person, based on multiple complaints for carnapping involving a motor vehicle, made possible through a “Pasalo Scheme”. Unfortunately, these kind of schemes are still rampant even up to now. Hence, car buyers and sellers should remain to be vigilant over the increasingly prevalent modus of pasalo-benta or the assume-balance scam, who targeted buyers who want to save money by purchasing cheaper vehicles, and also seller who need to transfer their liabilities. [2]
[1] Journal Online, 2 February 2021, “PNP-HPG warns public to be wary of ‘technical carnapping”, retrieved on 12 September 2024 from https://journal.com.ph/pnp-hpg-warns-public-to-be-wary-of-technical-carnapping/.
[2] Rappler, 30 September 2021, “Banko Sentral warns of ‘pasalo-benta’ auto loan scam”, retrieved on 12 September 2024 from https://www.rappler.com/business/bangko-sentral-pilipinas-warns-pasalo-benta-auto-loan-scam/.
