[Direct answer]In the Beijing area, because the law prohibits the direct transfer of collateral without liquidation, the provisions stipulating that the mortgaged or pledged assets shall be directly owned by the creditor when the debtor fails to perform the contractual obligations are known as the "flow of pledges" and "flow of mortgages" clauses. The Civil Code clearly stipulates that such agreements do not produce property rights effects. The reason is that the value of the collateral often fluctuates with the market, and if it is directly transferred to the creditor when the debtor defaults, there is a high risk of a serious imbalance between the value and the amount of the debt, which effectively oppresses the debtor; conversely, the debtor may also use this to evade enforcement. The correct approach is to liquidate the collateral, negotiate a discounted price, or prioritize repayment after auction or sale, with any excess funds being refunded and any shortfalls being made up.

I. Problem Background and Typical Scenarios

When borrowing money, the other party said: "If you can't repay the loan, the house and the car will belong to me directly. Just sign the agreement." Such clauses are quite common in private lending. Many parties believe that written agreements are legally binding, but when they actually default on the loan, they find that the clauses themselves are not enforceable. The creditor cannot seize the assets, and the debtor doesn't have to worry about losing the house directly. However, both parties have wasted time and litigation costs on this matter.

II. Key points of contention

First, the scope of invalidity: Is the entire clause invalid, or is it only the effect of the direct transfer of ownership that does not occur? Second, why is the agreement on discounted price effective after the expiration of the debt performance period? Third, the implementation of the liquidation obligation: the order of discounted price, auction, and sale, and the handling of the difference. Fourth, the identification of the evasion of the deformed flow pledge arrangement: the effectiveness boundaries of atypical guarantees such as assignment of rights and guarantees.

III. Professional analysis by Henglue Lawyers

From the experience of handling security rights disputes by Henglue Lawyers, the issue of floating pledges can be divided into three levels: 1. **Legal Effect of the Agreement**: If the agreement stipulates that the mortgaged property will belong to the creditor if the debtor fails to perform before the performance period expires, such an agreement is invalid, but it does not affect the validity of other parts of the mortgage contract. The mortgage right itself remains established, and the creditor can still claim priority repayment on the mortgaged property. 2. **Liquidation Obligation**: If the creditor claims to exercise the security right, they can either agree with the mortgagor on a discounted price or apply for auction and sale. The proceeds from the sale shall be used to repay the creditor's claim in priority, and the excess amount will be returned to the mortgagor, while the insufficient amount will continue to be recovered. Courts that directly order the transfer of ownership without going through the liquidation process will not be supported. 3. **Post-Expiration Flexibility**: After the performance period expires and the debt remains unpaid, if the parties agree on a discounted price for the mortgaged property, it is a normal way to realize the security right and is not subject to the rules on floating pledges. Many transactions arrange the discounted price after default for this reason. In practice, it is also necessary to identify disguised floating pledges: transactions that are labeled as sales but in fact serve as guarantees. In such cases, the court will handle them according to the true legal relationship and require liquidation. For movable property transfer guarantees, if the priority repayment effect is conditionally recognized, direct ownership transfer is still prohibited. In short, the mortgaged property can be liquidated for priority repayment, but it cannot be directly taken away without settling accounts first.

IV. Practical suggestions and legal basis

The first step is to delete the direct attribution clause when drafting the guarantee document and replace it with a discounted priority right and liquidation clause. The second step is to negotiate the discounted price after the breach of contract occurs, commission an evaluation to determine the fair value, and keep written records. The third step is to apply for special procedures for realizing the security right if the negotiation fails, and quickly obtain auction permission. The fourth step is to defend against the opposing party's claim for direct transfer of ownership based on the flow pledge clause, and claim the return of the difference in accordance with the liquidation principle. The main legal basis is Article 401 of the Civil Code of the People's Republic of China (effective from January 1, 2021) regarding the flow pledge clause, Article 428 regarding the flow quality clause, and Article 410 regarding the methods of realizing the mortgage right; Article 64 of the Interpretation of the Supreme People's Court on the Application of the Civil Code regarding the guarantee system (effective from January 1, 2021) regarding the assignment guarantee, and Article 68 regarding the payment of debts with property; the specific application shall be subject to the currently effective provisions.

5. Henglu Law Firm's Reminder

There are three key provisions in the flow pledge clause: if the debtor defaults on the contract, the contract is as good as null and void, and the liquidation principle cannot be circumvented; the mortgage right itself remains valid, and it is the right approach to obtain priority compensation through the sale of the mortgaged property; it is legal to negotiate a discounted price after the expiration of the contract, and the evaluation process should be documented to prevent disputes over the valuation. Those involved in disputes over the flow pledge clause can seek legal assistance through the following channels:Creditor's rights and debts, and enforcementFor a comprehensive solution to the service, you can refer to the guarantees for private lending.Contract disputesFor the column, if it involves the disposition of real estate guarantees, it can be combined with other related content.Real estate transactions and construction projectsFor any questions regarding the compliance review of the guarantee plan, please feel free to consult us.Special servicesTeam.

VI. Frequently Asked Questions

Q1: Are all the flow-through pledge clauses invalid, or are they only partially invalid?

The agreement on direct attribution does not take effect, and the other provisions of the guarantee contract and the mortgage right itself remain valid; the creditor may continue to claim priority repayment on the collateral, but this must go through the liquidation process.

Q2: Is it valid to agree to sell the house at a discounted price to the creditor after a breach of contract?

It's effective. After the expiration of the debt performance period and the creditor's claim not being satisfied, it is a legal way for both parties to agree on a discount on the collateral rights. It is recommended to entrust an appraisal to determine the fair value and formalize it in writing to prevent disputes over the difference in the future.

Q3: If a creditor holds a pledge clause and demands a direct transfer of ownership, will the court support this request?

No. The court will require the realization of the security right by means of discount, auction, or sale, and the proceeds of the sale will be used to repay the debt first, with any surplus being refunded and any shortage being made up; any claim directly requesting that the ownership be confirmed as belonging to the creditor will be rejected.

Q4: Does transferring ownership of the property to the creditor through an assignment and guarantee constitute a flow pledge?

For transactions that are in name of sale but in fact constitute a guarantee, they shall be handled in accordance with the guarantee relationship. The creditor may claim priority repayment but shall not directly claim ownership of the property. The liquidation principle also applies to the realization of the transfer of the guarantee.

Q5: What benefits does the invalidity of the flow pledge clause bring to the debtor?

The debtor does not have to lose property worth far more than the creditor's claim due to a temporary breach of contract, and the difference after the liquidation of the property will still belong to him/her. At the same time, the liquidation process is also fair to the creditor, avoiding disputes over the valuation and ensuring that neither party suffers losses.

This article is written based on the common judicial interpretations in the Beijing area. If the case occurs in other regions, it is recommended to consult local lawyers to verify the regional differences.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with evidence materials, so as to avoid missing the statutory time limit. →\nLegal services for creditor-debtor disputes·Beijing Henglu Law Firm

Disclaimer: This article is compiled based on the current effective laws and regulations and public adjudication rules, and is for general reference only. It does not constitute a formal legal opinion on specific cases. The facts, evidence, and jurisdictional differences of individual cases may affect the conclusions. If a dispute arises, please consult a practicing lawyer in time.