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I ask because a somewhat usurious former coworker (the lender) has a notarized agreement with a family member (the borrower) for a significant debt, where the house is used as collateral. The payment installations are exceedingly too much for the family member to afford while paying off mortgage and other debts.

If the house title is transferred to another family member, can it still be used as collateral if the borrower defaults on the promissory note loan?

Edit: The house is located in California, and the promissory note was also drafted in California, without a lawyer present, but signed by a notary.

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  • Does the lender have a lien on the house? That would be the most usual way to secure the collateral, and in most cases, the lien transfers with the property.
    – Nate Eldredge
    Jan 21, 2017 at 0:31
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    The lender does not have a lien on the house.
    – oohaba
    Jan 22, 2017 at 1:24
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    In was legal jurisdiction is the real estate located? The law differs. Also, if the house is used as collateral, then by definition the lender as a lien on the house. That is what collateral means. It might be an unperfected lien, but it is a lien. If the lender does not have a lien on the house then perhaps it was not actually used for collateral and was instead used as a basis for underwriting the loan which is an entirely different matter.
    – ohwilleke
    Jan 22, 2017 at 3:37
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    Edited the question, but the house is located in California. The term "Collateral" is used as a section header in the promissory note, but upon doing a title search in public records, there is no actual lien against the house from the lender.
    – oohaba
    Jan 23, 2017 at 5:51

3 Answers 3

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If the creditor has lodged a caveat on the title to the property, then the debtor will not be able to transfer ownership of the land. The land titles office will refuse to register any attempted transfer of the land while the caveat stands.

If the creditor has registered a charge on the title of the property, they will still be able to liquidate it to cover the debtor's debt regardless of whether the property changes hands.

If the security is not registered but the transferee of the land knows about the security, then the creditor can still recover from the transferee.

If the creditor can't recover from the transferee under their security, they may be able to make the debtor bankrupt and, under bankruptcy law, unwind or claw back the transfer of the property. That puts the property back in the possession of the debtor's trustee in bankruptcy, who will sell it to pay the creditor.

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  • I added a comment to the question above, but to clarify, there is no existing lien (or caveat, charge) on the title of the property from the lender--at least as far as I can tell from the public records. (There are existing federal and state tax liens, but those are unrelated.) Since you mention bankruptcy, would it be possible to file a Chapter 7 or 13 in order to consolidate the personal debt in an effort to lower the payments? The debtor had previously filed a Chapter 13 in 2011. (I know little about bankruptcy, so bear with me.)
    – oohaba
    Jan 23, 2017 at 5:58
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Assuming the lender has validly registered their interest in the property (a lien) then the property cannot be legally transferred without the lender's consent (usually requiring discharge of the loan).

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  • To be clear, that would be the British law and not the American law. It isn't clear which applies in this case.
    – ohwilleke
    Jan 22, 2017 at 5:43
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The question does not state the jurisdiction involved. In most U.S. jurisdictions, the property could be transferred, but the lien against the collateral securing the loan would still be effective against the new owner, so the property could be seized upon a default under the loan. Also, the transfer itself would probably be a default under the loan terms.

Even if the lien was not recorded, if the transferee of the house knew that the loan with the house as collateral existed, the transferee would be bound under U.S. law in most cases.

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