If collateral secured in a promissory note no longer belongs to the borrower, what happens on default?
<p>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.</p>

<p>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?</p>

<p>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.</p>

<p>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.</p>

<p>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.</p>

<p>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.</p>

<p>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.</p>

<p>Assuming the lender has validly registered their interest in the property (a lien) then the property <em>cannot</em> be legally transferred without the lender's consent (usually requiring discharge of the loan).</p>

<p>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.</p>

<p>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.</p>

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