Rights and Remedies Under the Chattel Mortgage Law

This article explains how—and when—a motor vehicle may be repossessed even if no demand letter was sent, and what protections a buyer/borrower (“mortgagor”) has under Philippine law. It synthesizes rules from the Chattel Mortgage Law (Act No. 1508), the Civil Code, and long-standing jurisprudential principles. It’s general information, not legal advice.

1) Quick primer: what a chattel mortgage is (and why it matters)

A chattel mortgage is a security arrangement where movable property (e.g., a car) is used to secure an obligation (usually the car loan or the unpaid purchase price).
The mortgage must be in writing, typically includes an Affidavit of Good Faith, and is registered with the Chattel Mortgage Register where the mortgagor resides or where the chattel is located.
If the borrower defaults under the contract, the mortgagee (bank, finance company, dealer’s assignee) may foreclose the mortgage—i.e., take and sell the car to satisfy the debt.

2) Is a demand letter required before repossession?

Short answer

Not always. Philippine law does not categorically require a demand letter before a secured creditor takes back a vehicle if:

the borrower is already in default under the contract, and
the contract validly waives the need for prior demand or makes time of payment essential (see Civil Code Art. 1169 exceptions to the general “demand required” rule).

In practice, most creditors still send a demand letter to avoid disputes. But the absence of a demand letter does not automatically make a repossession illegal.

Why demand is sometimes unnecessary

Under Art. 1169 (Civil Code), a debtor is in delay (mora) only after demand unless:

the obligation or the law expressly so declares;
the time of performance is determinant (i.e., fixed date makes demand useless); or
demand would be useless (e.g., debtor has made performance impossible).

Loan and chattel mortgage contracts commonly state that default occurs upon failure to pay on due date and that the creditor may repossess without prior notice. Courts have long upheld such clauses provided repossession is peaceful and foreclosure rules are followed.

3) Self-help repossession vs. foreclosure: know the difference

A) Taking possession (self-help/peaceful repossession)

Goal: Secure the car pending foreclosure sale.
How: Typically through the creditor’s agents without force or intimidation and without breaching the peace.
Limits: No breaking into premises, no threats or violence, no deceit or harassment. If the debtor refuses to surrender, the safer path is judicial replevin (court-assisted seizure).

B) Foreclosure and sale (conversion of the car into cash to pay the debt)

Governed by Act No. 1508. After default, the mortgagee may foreclose and sell the car at public auction.
Notice of sale and public auction formalities are mandatory. Exact notice mechanics and posting/publication requirements are set by the statute and implementing practice; in essence, the debtor must be given prior notice of the sale, and the sale must be conducted in a manner that is public and commercially reasonable.
Proceeds go to: (1) foreclosure costs; (2) the secured debt and interest; (3) surplus (if any) to the debtor.

Important: Pactum commissorium (automatic ownership by creditor upon default) is void. The creditor cannot simply keep the car in satisfaction of the debt; a proper sale is required.

4) What if there was no demand letter and the car was taken?

Ask these questions to assess legality:

Was there a real default?
- Missed due date(s) covered by the contract?
- Any valid grace period or loan restructuring in writing?
Did the contract waive prior demand or make time essential?
- Common in standard loan/CM forms. If yes, demand may not be required to take possession.
Was the repossession peaceful?
- No force, intimidation, or trespass? If breach of peace occurred, repossession may be unlawful even if you were in default.
Were foreclosure sale formalities observed?
- Notice of sale to you, public auction, accounting of proceeds. Skipping these can invalidate a deficiency claim and open the creditor to damages.
What does your transaction type allow regarding deficiency?
- See Section 6 below (Recto Law vs ordinary loan).

5) Your rights as a debtor/mortgagor

Right to peaceful treatment. No force, threat, or deception during repossession efforts.
Right to cure before sale. You can generally reinstate or pay in full before auction to get the car back (check your contract—fees/penalties may apply).
Right to notice of sale and a public auction conducted per Act No. 1508.
Right to an accounting: written breakdown of sale proceeds, costs, and the resulting surplus (refundable to you) or deficiency (if legally collectible).
Right against “pactum commissorium.” Creditor must sell; it can’t automatically own the car by default.
Right to privacy and respectful collection. Harassment, threats, and public shaming are prohibited by general civil/criminal norms and sector rules (banks, financing and lending companies are subject to fair collection standards).
Right to challenge wrongful repossession/foreclosure via complaints (civil action for damages, replevin to recover the car, or regulatory complaints against finance/lending entities).

6) Will you still owe a deficiency after auction?

This depends on the nature of your transaction:

If it’s a sale on installments of personal property (e.g., you bought the car on installments and the chattel mortgage secures the unpaid purchase price), the Recto Law (Civil Code Art. 1484) applies.
- If the seller (or its assignee/financier standing in its shoes) forecloses, no deficiency may be collected after the auction. Any shortfall is for the seller/assignee’s account.
If it’s an ordinary loan (e.g., you borrowed money and used an already-owned car as collateral), deficiency is generally collectible after a valid foreclosure sale—unless the contract or special laws say otherwise.

Tip: Many dealer-bank arrangements are structured so the bank/finance company is assignee of the installment sale with a chattel mortgage securing the purchase price. In such cases, courts have repeatedly applied Art. 1484(3) to bar deficiency claims after foreclosure. If your documents show that setup, scrutinize any deficiency demand.

7) Common illegal or defective practices (and what you can do)

Problematic practice	Why it’s an issue	What you can do
Repossession with force, threats, or trespass	Breach of peace; may be unlawful even with default	Document incident, identify agents, file police blotter if needed; consider civil suit for damages and/or replevin
No notice of foreclosure sale	Violates Act No. 1508 sale requirements	Challenge sale’s validity; oppose deficiency; seek damages
Private sale to affiliate without public auction	Usually invalid under chattel mortgage rules	Same as above; ask for accounting and set it aside
Keeping the car without auction (“pactum commissorium”)	Void under Civil Code	Demand return or proper sale; claim damages
Inflated fees (repo/storage) with no proof	Unreasonable charges not recoverable	Ask for receipts; dispute in accounting
Deficiency claim after foreclosure of an installment sale	Barred by Recto Law	Invoke Art. 1484(3); demand waiver/withdrawal

8) What creditors are allowed to do (if done correctly)

Peacefully take possession after actual default, especially where the contract waives prior demand or makes time essential.
Foreclose under Act No. 1508 with proper notice and public auction.
Apply proceeds to the debt and collect deficiency if (and only if) the transaction is a non-Recto loan and the sale was validly conducted.
Charge reasonable costs (repo, storage, auction) proved by documentation.

9) Practical playbook if your car was taken without a demand letter

Get your papers in order. Gather the promissory note, chattel mortgage, disclosure statement, sales invoice/OR/CR, and any demand or collection communications.
Confirm default status. Identify missed due dates, grace periods, and any restructuring.
Read the “no-demand” clause. Many contracts say “upon default, creditor may repossess without notice.” Note exact wording.
Ask—in writing—for:
- copy of the repo report and inventory,
- the scheduled auction details (date, time, place),
- a full statement of account and breakdown of fees.
Decide whether to redeem. Before auction, you may reinstate (pay arrears + fees) or pay off to retrieve the car. Get amounts in writing.
After auction, demand the auction records, final accounting, and surplus (if any). If you receive a deficiency claim, evaluate if Recto Law bars it given your transaction structure.
If laws/steps were skipped, consult counsel on:
- Replevin (recover the car if sale hasn’t happened or was void),
- Annulment of sale,
- Damages for unlawful repossession or improper foreclosure,
- Regulatory complaints (e.g., against abusive collection practices).

10) FAQs

Q1: They showed up and took the car without a letter. Is that automatically illegal? No. If you were in default and your contract waives prior demand, possession can be taken peacefully. But they must still foreclose properly (notice + public auction) before keeping or disposing of the car and before claiming any deficiency (if allowed).

Q2: Can I stop them at the gate? You may refuse if you believe there’s no default or the agents are using force or lack authority. Do not resort to violence. Ask for IDs, authority letters, and record the encounter. If they insist with threats, call authorities and document everything.

Q3: Can they enter my home or closed garage? Forcible entry is risky and may be unlawful. Creditors should avoid breach of peace; otherwise, they should go to court (replevin).

Q4: Do I have a right to redeem after the auction? There is no statutory right of redemption for chattel foreclosure after the auction (unlike real estate). Redemption is typically before sale, per contract.

Q5: They’re demanding a big deficiency after auction. Check if your deal is a sale on installments with an assigned CM securing the purchase price—if so, Recto Law may bar deficiency claims after foreclosure.

11) Compliance checklist for creditors (to gauge if they played fair)

Written CM with Affidavit of Good Faith, properly registered
Actual default under contract (and, if invoked, a valid no-demand clause)
Peaceful repossession (no force, threats, trespass) or replevin order
Notice of sale served and public auction conducted under Act No. 1508
Accounting: itemized costs, application of proceeds, turnover of surplus
Deficiency pursued only if legally permissible (non-Recto transaction)

12) Evidence you should keep

Contract set: PN, CM, disclosure statements, dealer-bank assignment (if any)
Payment records and due dates
Any texts/emails/letters from collectors/agents (including call logs)
Photos/videos of the repossession (date-stamped)
Auction notices, proof of posting/publication, bidding sheets, bill of sale
Final accounting/statement of account

13) Key doctrines to remember

No universal demand-letter prerequisite. Demand can be waived; default can be automatic on a date.
Peaceful repossession only. Breach of peace taints the taking.
Foreclosure formalities are mandatory. Skipping notice/public auction/accounting undermines deficiency claims and invites liability.
No pactum commissorium. Creditor must sell, not keep by default.
Recto Law shields installment buyers from deficiency after chattel foreclosure of the purchase-money obligation.

Final word

If your car was repossessed without a demand letter, focus on: Was I truly in default? Was my contract’s “no-demand” clause valid? Was the taking peaceful? Were foreclosure sale rules followed? The answers—not the presence or absence of a letter—decide the legality and your remedies. For case-specific strategy, consult a Philippine lawyer with your documents in hand.