Legal Analysis of Third Party Guarantees Not Included in Mortgage Rights in Bad Debt

Abstract

A credit agreement executed without collateral remains legally valid under Indonesian civil law insofar as it
complies with Article 1320 of the Civil Code. Although such arrangements are not regulated under the
Mortgage Law due to the absence of land or building collateral, this type of credit is still recognized in banking
practices and may be implemented as long as it adheres to the prudential principles applicable to
creditworthiness assessment. Nevertheless, the absence of mortgage rights significantly weakens the creditor’s
legal position when default occurs, as it eliminates the possibility of direct execution against the collateral.
Accordingly, dispute resolution must be pursued through civil litigation. Such circumstances are reflected in
Decision No. 273 /Pdt.G/2023/PN.Jkt.Sel, which demonstrates that third-party assets pledged without mortgage
rights cannot be directly enforced. Even when the asset physically exists, the establishment of a mortgage
constitutes an indispensable requirement to ensure legal certainty and the creditor’s priority ranking. Without it,
the pledged property is treated merely as general collateral without preferential status, thereby compelling the
parties to rely on general legal remedies or negotiation, both of which entail a substantial risk of inefficacy.