Overview

In the Philippines, a personal loan receivable (the lender’s right to collect a debt) is generally transferable to another person or entity—such as a collection agency—even if the original loan was not covered by a written contract. This transfer is usually done through assignment of credit (also called cession of rights).

However, while assignment is legally possible, the lack of a written loan contract creates practical and evidentiary problems that can dramatically affect enforceability, collection strategy, and the assignee’s ability to sue.

This article explains the governing rules, what an assignee must prove, the limits on collection agencies, and the risks and best practices in Philippine setting.

1. Key Legal Concepts

1.1. Credit or Receivable as Property

A loan receivable is a form of property right (an incorporeal right). Philippine civil law allows property rights to be transferred unless prohibited by law, morals, public policy, or the parties’ agreement.

1.2. Assignment of Credit (Cession of Rights)

Assignment of credit is a contract where the lender (assignor) transfers to another (assignee) the right to collect a debt from the borrower (debtor).

It is governed mainly by the Civil Code provisions on:

Obligations and Contracts
Assignment / Sale of Credits
Rights of the Debtor

Assignment is different from:

Agency for collection (collector only acts for lender; ownership stays with lender)
Subrogation (third party pays and steps into lender’s shoes)
Novation (debt itself is altered/replaced with consent)

2. Is a Written Loan Contract Required for Assignment?

2.1. Loan Itself Can Be Oral

A simple personal loan (mutuum) does not require a written contract to be valid. Consent can be oral; what matters is proof that:

money/property was delivered, and
the borrower agreed to repay.

So the original receivable can exist even without writing.

2.2. Assignment Must Be in Writing to Bind Third Parties

While a loan may be oral, the assignment of that loan receivable should be written as a matter of law and proof.

In practice:

Assignment is treated like a sale/transfer of an incorporeal right.
To be enforceable and registrable and to clearly prove ownership of the receivable, a written deed is strongly necessary.
Courts expect a written assignment if the assignee will sue.

So: Yes, you can assign an oral-loan receivable. But you should do the assignment in writing.

3. Effect of Assignment on the Borrower

3.1. Debtor’s Consent Is Not Required

A borrower’s consent is generally not needed for assignment. The lender may sell/transfer the credit without asking permission.

3.2. Debtor Must Be Notified

The assignment does not prejudice the debtor unless the debtor is notified.

Until notice:

If the borrower pays the original lender in good faith, the payment is valid and extinguishes the debt.
The collection agency (assignee) cannot fault the borrower for paying the lender if no notice was given.

Notice can be:

judicial (e.g., through a complaint in court), or
extrajudicial (formal demand letter informing debtor of transfer).

3.3. Debtor Keeps All Defenses

The borrower may raise any defense against the assignee that they could have raised against the original lender, such as:

no loan existed,
loan already paid,
loan amount is wrong,
interest is illegal/usurious in effect,
fraud, mistake, intimidation, or lack of consent.

This is crucial if the original loan was oral.

4. What Must Be Proven If There Is No Written Loan Contract?

When the collector sues, the assignee must prove:

Existence of the loan, and
Amount and terms, and
Non-payment, and
Valid assignment to the assignee.

4.1. Evidence for an Oral Loan

Possible proofs include:

bank transfer records, e-wallet logs, remittance slips,
borrower’s written acknowledgments (texts, emails, chats),
promissory notes (even if informal),
receipts of partial payments,
witnesses to the transaction,
borrowing history and communications.

4.2. If Proof Is Weak, Enforcement Is Weak

Without writing, the case often becomes:

a credibility contest,
dependent on documentary trails,
vulnerable to denial.

So assignment may be legally valid, but collection may be risky.

5. Can a Collection Agency Collect Without Owning the Debt?

Yes. Two models exist:

5.1. Assignment / Sale of Credit

Agency becomes new creditor
Collects in its own name
Can file suit as real party in interest
Needs a written deed of assignment + proof of loan

5.2. Agency for Collection (No Transfer)

Lender remains creditor
Agency is merely an agent/service provider
Agency collects in lender’s name
Any lawsuit should be filed by lender, not agency

This model is used when:

lender wants to keep control, or
loan documentation is messy and transfer would be hard to prove.

6. Limits on Collection Practices in the Philippines

Even with a valid assignment, collection agencies must follow Philippine laws and rules on harassment, privacy, and unfair collection.

6.1. Prohibited Acts (General Standards)

Collectors must not:

threaten violence or criminal prosecution without basis,
shame or publicly humiliate the borrower,
use obscene or insulting language,
contact neighbors/employers in a way that reveals the debt improperly,
pretend to be law enforcement or court officers,
seize property without court process.

Such actions can expose collectors and creditors to civil and criminal liability.

6.2. Data Privacy Considerations

If personal data is used in collection (names, contacts, employment info), the collector must comply with Data Privacy Act of 2012 principles:

legitimate purpose,
proportionality,
transparency,
security.

Unauthorized disclosure to third parties can be penalized.

7. Interest and Charges Without a Written Contract

7.1. Interest Must Be Expressly Stipulated

Under Civil Code doctrine:

Interest is not due unless expressly agreed.
If the loan contract is oral and there is no clear proof of agreed interest, a court may disallow interest—or allow only legal interest from demand or filing of case.

7.2. Unconscionable Interest Can Be Reduced

Even if interest was orally agreed, courts can reduce interest that is:

excessive,
shocking to conscience,
contrary to morals/public policy.

Collection agencies inherit this risk.

8. Litigation Issues for Assignees

8.1. Standing to Sue

The assignee can sue only if it proves ownership of the credit through assignment.

8.2. Evidence Burden

Because there is no written loan, courts will examine:

authenticity of money transfer,
behavior of parties after lending,
proof of demands,
partial payments,
consistency of communications.

If the assignee cannot show a clear chain of proof, the complaint may fail.

9. Special Situations

9.1. Verbal Loans Between Friends/Family

These are valid, but often hard to prove. Assignments are possible, but collectors may be reluctant unless evidence is strong.

9.2. Loans With Post-Dated Checks

If borrower issued checks, the debt is easier to prove. But bouncing checks can bring criminal exposure under BP 22 only if all legal elements are met, and collectors must not use BP 22 threats abusively.

9.3. Assignment to Foreign Entities

A foreign company can be assignee, but collection and litigation in PH may require:

proper capacity to sue,
compliance with foreign corporation rules if doing business locally.

10. Practical Risks of Assigning an Oral Loan

Proof risk – assignee may not prove loan in court.
Interest risk – assignee may collect only principal or reduced interest.
Notice risk – debtor may validly pay original lender if not informed.
Defense risk – debtor can raise all original defenses.
Reputation/legal risk – improper collection creates liability.

11. Best Practices When Assigning an Oral-Loan Receivable

For the Original Lender

Execute a Deed of Assignment with clear details:
- debtor identity,
- principal amount,
- date of loan,
- evidence list attached,
- warranties that credit exists and is unpaid.
Compile evidence trail (bank proofs, chats, receipts).
Send written Notice of Assignment to debtor.

For the Collection Agency / Assignee

Do due diligence:
- verify loan existence from objective records,
- check for payments or disputes,
- assess collectability.
Require representations and indemnities from lender.
Keep collection compliant; document all demands.

For the Borrower (Awareness)

Ask for proof of assignment before paying.
Demand statement of account and evidence.
Keep records of previous payments and communications.

Conclusion

Assignment of a personal loan receivable to a collection agency is legally allowed in the Philippines even if the loan was oral. The borrower’s consent is not needed, but notice to the borrower is essential to bind them to pay the new creditor.

Still, the absence of a written loan contract shifts the battlefield to proof. The assignee must establish the loan’s existence, amount, non-payment, and the validity of the assignment. Weak documentation means weak enforceability.

For lenders and collection agencies, the safest path is: document the assignment in writing, attach all evidence of the oral loan, notify the debtor formally, and collect within lawful and privacy-compliant limits.