Short answer. No, as a rule it falls with the old loan. Article 1296 provides that when the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.

What the law says

When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.

Civil Code, Article 1296 — Effect of Novation on Accessory Obligations. Read the full provision →

Security is accessory, so it follows the principal

A mortgage, a pledge, a guaranty and a penalty clause have no independent life. Each exists to secure a particular obligation, and when that obligation is extinguished there is nothing left for it to secure. Article 1296 states the consequence: When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. So an extinctive novation wipes the security out, and the exception preserved is a narrow one — it operates for the benefit of a third person who never agreed to the change, not for the benefit of the creditor who negotiated it.

The prior question is whether a novation happened at all

This is where most of these disputes are actually decided, and the threshold is high. Article 1292 provides that for an obligation to be extinguished by another substituting it, it is imperative that this be declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. A restructured schedule, a repriced rate or a rolled-over facility usually fails that test, and where the original obligation merely continues in amended form, nothing has been extinguished and the collateral continues untouched. Novation is not presumed, and neither is the release of security.

The third parties the exception protects

The words about non-consenting third persons matter most to guarantors and to accommodation mortgagors — people who pledged their own property or credit for someone else's debt. Their exposure was measured against the obligation as it stood when they agreed to it. If the debtor and the creditor then rewrote that obligation without asking them, the law does not silently extend their liability to the new arrangement. That is also why lenders insist on the surety or third-party mortgagor signing the restructuring: consent obtained at that point is what carries the security across.

What the document should say

Whichever side of this you are on, the restructuring instrument should answer the question in terms rather than leave it to Article 1296. Either it states that the original obligation subsists as amended and that all existing security continues to secure it, or it states that the original is extinguished and identifies exactly what new security is being constituted. If a guarantor or third-party mortgagor is meant to remain bound, obtain a signature. Then check what is on the register: a real estate mortgage that has been cancelled of record does not revive because the parties later agreed it should.

Cases citing this provision

These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.

Related provisions

Note. Statute text quoted on this page is reproduced from the official enactment and is linked to the full provision. The explanation around it is general legal information from Vivas & Nobles Law Office, not legal advice. Whether it applies to your situation depends on facts only a lawyer reviewing them can assess.