Co-Maker Liability on Provident-Fund Loans in the Philippines
A deep-dive for lawyers, HR administrators, and fund members
1. What is a “co-maker”?
| Role | Short definition | Key Code provisions |
|---|---|---|
| Principal Borrower | Receives and uses the loan proceeds | Arts. 1157-1165, Civil Code |
| Co-Maker (often labelled co-borrower or surety) | A third person who binds himself “solidarily” with the borrower to repay the loan | Arts. 1207-1222 (solidary obligations); Art. 2047 (suretyship) |
| Guarantor | Promises to pay only after the creditor exhausts remedies against the borrower | Arts. 2047-2054 |
In provident-fund lending forms (GSIS, Pag-IBIG, SSS Employees’ Funds, private provident funds), the co-maker is almost always a surety—i.e., the loan contract uses the words “solidarily liable” or “as principal”. Consequently, the creditor may sue the co-maker immediately and directly, without first pursuing the defaulting borrower.
2. Statutory & regulatory backdrop
Civil Code (1949)
- Articles 1207-1222 – Governs solidary obligations.
- Articles 2047-2054 – Defines and regulates suretyship vs. guaranty.
RA 8291 (GSIS Act of 1997)
- §42-43 empower GSIS to grant salary and emergency loans funded by the GSIS Provident Fund (GPF).
- GSIS Circular #003-2013 requires “two co-makers who are active GSIS members, jointly and severally liable.”
RA 9679 (Home Development Mutual Fund Law of 2009, a.k.a. Pag-IBIG)
- §22 authorises the Multi-Purpose Loan (MPL) and Calamity Loan.
- Pag-IBIG Fund Circular No. 310 (2019) no longer requires a co-maker for MPL if the member has 24 monthly savings and meets net-take-home-pay rules, but private employers’ in-house provident funds often still demand one.
SSS Charter (RA 11199, 2018) – SSS proper does not run a provident-fund facility for members, but many SSS Employees’ Provident Funds (an internal HR benefit) adopt co-maker clauses patterned after GSIS forms.
Private-sector provident funds (e.g., MERALCO Employees PF, PLDT PF, BPI PF) are governed by:
- Trust law under the Civil Code & Trust Receipts Act, plus
- DOLE Department Order 174-17 on company-established welfare/wage deduction schemes.
3. Jurisprudence shaping co-maker liability
| Case | G.R. / Date | Doctrine relevant to co-makers |
|---|---|---|
| “Development Bank of the Phils. v. Court of Appeals” | G.R. No. 93415, Jan 24 1992 | Surety’s liability is “joint and several, immediate and direct.” |
| “Spouses Toring v. Ganzon” | G.R. No. 190706, Dec 3 2014 | Even without the word surety, signing “as co-maker” with waiver of benefits of excussion & division = solidary. |
| “Land Bank v. Umandap” | G.R. No. 171439, Apr 24 2009 | Co-maker may raise defenses available to principal debtor except those purely personal to the debtor (Art. 1222). |
| “Cruz v. Bancom Development Corp.” | G.R. No. 71755, Mar 3 1992 | Employer payroll deducting from co-maker’s salary is valid if authorised in writing. |
No Supreme Court case has yet squarely involved GSIS or Pag-IBIG co-makers, but lower-court rulings consistently apply the same solidary-surety framework.
4. Typical loan-contract clauses and their effects
Solidary Liability Clause
“We, the borrower and the co-maker(s), hereby bind ourselves solidarily to pay…” Effect: The fund can sue any one of them for 100 % of the outstanding balance.
Waiver of Excussion
“…waive the benefit of excussion.” Effect: The co-maker cannot insist that the creditor first exhaust the borrower’s assets (Art. 2058).
Automatic Payroll Deduction Agreement (APDA) Effect: Employer may deduct from the co-maker’s salary upon fund’s notice without court action (Cruz case).
Right of Recourse/Subrogation (often implicit)
- Civil Code Art. 1216 & 1217: After paying, the co-maker may seek reimbursement from the borrower and is subrogated to the fund’s rights (may even foreclose collateral).
- Prescriptive period: 10 years (Art. 1144).
5. Defenses & risk-mitigation for co-makers
| Stage | Practical steps / legal defenses |
|---|---|
| Before signing | • Scrutinise loan purpose, term & amount. • Demand a counter-indemnity agreement from the borrower. • Check if the fund offers alternative security (e.g., mortgaging borrower’s retirement credits). |
| After borrower defaults | • Pay under protest, then sue for reimbursement (Art. 1217). • Invoke defenses intrinsic to the obligation (e.g., prescription, lack of consideration). |
| Against payroll deductions | • If APDA lacks original signature or exceeds statutory 20 % net-take-home-pay cap (RA 11466 for gov’t employees), seek injunctive relief. |
| Bankruptcy of borrower | • File a claim in the insolvency/conservatorship proceedings to share in dividends. |
6. Employer’s duties & potential liabilities
- Sec. 11, GSIS Circular 003-2013 imposes a ₱ 200 per day penalty on agencies that fail to remit payroll deductions, regardless of borrower’s or co-maker’s payment.
- DOLE Labor Advisories warn against “double deduction” (both borrower and co-maker) exceeding 50 % of Disposable Income (RA 8972 ceiling for solo parents is higher).
- Data-privacy compliance: Payroll offices processing co-maker information must observe NPC Circular 16-01 (Data Sharing Agreements).
7. Tax, accounting & HR treatment
| Aspect | Treatment |
|---|---|
| Loan proceeds | Non-taxable fringe benefit to the borrower if interest ≥ prevailing bangko-sentral rate; otherwise FBT applies (BIR RMC 50-2018). |
| Co-maker’s contingent liability | Off-balance-sheet note disclosure under PFRS 9 until crystallised. |
| Payroll deduction | Recorded as Liabilities – Provident Fund until remitted. |
8. Compliance checklist for provident-fund administrators
- Clear, plain-language surety clause with explicit solidary wording.
- Informed consent – Provide a Co-Maker’s Risk Sheet summarising liabilities.
- Standardised APDA vetted by DOLE and NPC.
- Fair collection hierarchy – First borrower, then co-maker; avoid simultaneous full deductions.
- Post-payment remedies – Assist co-maker in subrogation to encourage volunteerism.
9. Emerging trends
- Digital signature adoption (e-Commerce Act & DICT Circular 16-2020) makes it easier to bind co-makers. Courts have ruled electronic surety undertakings enforceable if the authentication logs are preserved.
- Some large employers abolish co-makers altogether, replacing them with salary-pledge structures secured by Separation Pay and Retirement Credits.
- Proposed amendments to the GSIS law (House Bill 9181, 19th Congress) would cap co-maker liability to 50 % of the loan—watch this space.
10. Key takeaways
- Signing as co-maker = Becoming a surety. Liability is immediate, direct, and for the whole amount.
- No prior resort to borrower needed. The provident fund may proceed straight against salary or assets of the co-maker.
- Full reimbursement rights exist—but only after payment.
- Thorough employer processes (pre-loan counselling, risk disclosures, deduction limits) protect both the fund and employees.
- Legislative and policy shifts are narrowing co-maker requirements, but they remain common—and risky—for now.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific situations, consult competent Philippine counsel.