Co-Maker on a Loan Philippines: How to Be Released and What Documents Are Needed

Co-Maker on a Loan in the Philippines: How to Be Released and What Documents Are Needed

Introduction

In the Philippine financial landscape, borrowing money often involves more than just the principal borrower. Lenders frequently require additional security to mitigate risks, and one common form is the involvement of a co-maker. A co-maker is an individual who signs the loan agreement alongside the primary borrower, thereby assuming joint and several liability for the repayment of the loan. This means the co-maker can be held fully responsible for the debt if the borrower defaults, without the lender needing to exhaust remedies against the borrower first.

Under Philippine law, particularly the Civil Code of the Philippines (Republic Act No. 386), co-makers are typically treated as sureties rather than mere guarantors. Article 2047 of the Civil Code defines suretyship as a contract where a person binds himself solidarily with the principal debtor. This solidarity imposes equal obligations on both the borrower and the co-maker. The role is prevalent in personal loans, car loans, housing loans, and small business financing from banks, credit cooperatives, and lending companies regulated by the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC).

While being a co-maker can help a friend or family member secure financing, it carries significant risks, including potential credit impairment, legal actions for collection, and even asset seizure. This article comprehensively explores the concept of a co-maker in the Philippine context, the processes for release from such obligations, and the necessary documentation. It draws from relevant laws, including the Civil Code, the Negotiable Instruments Law (Act No. 2031), and BSP regulations on lending practices.

Understanding the Role and Liabilities of a Co-Maker

Legal Definition and Distinctions

A co-maker is distinct from a guarantor. A guarantor (under Article 2047) is subsidiarily liable, meaning the creditor must first pursue the principal debtor before turning to the guarantor. In contrast, a co-maker's liability is solidary (Article 1207-1222 of the Civil Code), allowing the lender to demand full payment from the co-maker immediately upon default.

This solidarity is often explicitly stated in the promissory note or loan agreement. For instance, in bank loans, the co-maker signs the same promissory note as the borrower, making them a co-obligor. The Supreme Court of the Philippines has upheld this in cases like Philippine National Bank v. Court of Appeals (G.R. No. 107508, 1995), emphasizing that co-makers are bound by the terms of the contract and cannot escape liability easily.

Risks and Implications

• Financial Exposure: The co-maker's credit score can be affected by the borrower's payment history, as reported to credit bureaus like the Credit Information Corporation (CIC) under Republic Act No. 9510.
• Legal Actions: Upon default, lenders can file collection suits, leading to judgments enforceable via writs of execution (Rules of Court, Rule 39).
• Impact on Future Borrowing: Being a co-maker ties up the individual's debt-service capacity, potentially limiting their own loan approvals.
• Tax Considerations: In rare cases, if the co-maker pays the debt, it might be treated as a donation subject to donor's tax under the Tax Code (Republic Act No. 8424, as amended).

Co-makers are common in informal lending (e.g., "5-6" schemes) but are more formalized in institutional settings. BSP Circular No. 941 (2017) requires lenders to disclose risks to co-makers during loan origination.

Grounds for Release as a Co-Maker

Releasing a co-maker from liability requires extinguishing the accessory obligation tied to the principal debt. Under Article 1231 of the Civil Code, obligations are extinguished by payment, loss of the thing due, condonation, confusion, compensation, novation, rescission, fulfillment of resolutory condition, or prescription. For co-makers, the most practical ways include:

1. Full Payment or Settlement of the Loan

The simplest release occurs when the loan is fully paid by the borrower or co-maker. Once the principal obligation is satisfied, the co-maker's liability automatically ceases (Article 1231).

2. Novation of the Loan Agreement

Novation (Article 1291-1304) involves substituting the old obligation with a new one, such as refinancing the loan without the co-maker's involvement. This requires the lender's consent and can release the co-maker if explicitly agreed upon.

3. Condonation or Remission

The lender may voluntarily forgive the debt (Article 1270), releasing all parties, including the co-maker. This is rare but possible in hardship cases or negotiations.

4. Substitution of Co-Maker

With lender approval, a new co-maker can replace the original one via an amendment to the loan agreement. This is akin to novation but limited to the surety aspect.

5. Prescription

If the loan obligation prescribes (e.g., 10 years for written contracts under Article 1144), the co-maker is released. However, prescription must be pleaded as a defense in court.

6. Invalidity or Nullity of the Contract

If the loan agreement is void (e.g., due to lack of consent or illegality under Articles 1409-1422), the co-maker may seek judicial declaration of nullity, releasing them from liability.

7. Release by Mutual Agreement

Parties can negotiate a release deed where the lender agrees to discharge the co-maker, often in exchange for partial payment or other considerations.

Challenges in Release

Lenders are reluctant to release co-makers mid-loan due to reduced security. If the borrower defaults, the co-maker cannot unilaterally withdraw without court intervention. In Security Bank and Trust Co. v. Cuenca (G.R. No. 138544, 2000), the Supreme Court ruled that sureties remain liable unless expressly released.

Step-by-Step Process to Be Released as a Co-Maker

Step 1: Review the Loan Documents

Examine the promissory note, deed of suretyship, or loan agreement for release clauses. Check for any provisions on early release or conditions.

Step 2: Communicate with the Lender

Initiate discussions with the bank or lending institution. Provide reasons for release (e.g., improved borrower creditworthiness) and propose alternatives like a new co-maker.

Step 3: Negotiate Terms

If the lender agrees, negotiate the terms, which may include partial payments, fees, or updated collateral.

Step 4: Execute Release Documents

Formalize the agreement through legal documents (detailed below).

Step 5: Update Credit Records

Request the lender to notify the CIC to update credit reports, removing the co-maker's association with the loan.

Step 6: Seek Legal Advice if Denied

If the lender refuses, consult a lawyer for potential court action, such as filing for declaratory relief under Rule 63 of the Rules of Court.

In cases of default, the co-maker may pay the debt and then seek reimbursement from the borrower via subrogation (Article 2066).

Documents Needed for Release

The specific documents vary by lender and scenario, but generally include:

Essential Documents

1. Original Loan Agreement/Promissory Note: To reference the original terms.
2. Release Deed or Waiver of Liability: A notarized document where the lender expressly releases the co-maker. It should state the loan details, parties involved, and consideration (if any). This is crucial for novation or mutual release.
3. Amended Loan Agreement: For substitutions or novations, a new contract excluding the co-maker.
4. Proof of Payment: Official receipts, bank statements, or a certificate of full payment if the loan is settled.
5. Affidavit of Release: Sworn statement by the lender confirming discharge, often required for property-related loans.

Supporting Documents

• Identification Documents: Valid IDs (e.g., passport, driver's license) of all parties.
• Borrower's Consent: If required, a notarized consent from the principal borrower.
• Credit Report: From CIC, to verify status.
• Court Order: If release is judicially obtained (e.g., in nullity cases).
• Substitution Agreement: For replacing with a new co-maker, including the new party's financial statements.

For banks, BSP regulations mandate that releases be documented in writing. Notarization is advisable for enforceability under the Notarial Law (Republic Act No. 8792, e-Commerce Act considerations for digital docs).

Special Considerations in the Philippine Context

• Rural Banks and Cooperatives: Governed by Republic Act No. 9520 (Cooperative Code), releases may involve board approvals.
• Online Lending Platforms: Under SEC Memorandum Circular No. 19 (2019), digital signatures are valid, but releases must comply with data privacy laws (Republic Act No. 10173).
• COVID-19 Impacts: Moratoriums under Bayanihan Acts (Republic Acts No. 11469 and 11494) temporarily suspended collections, potentially aiding negotiations.
• Tax Implications: Releases might trigger income tax if seen as debt forgiveness (Revenue Regulations No. 2-98).
• Dispute Resolution: Disputes can be mediated via the BSP Consumer Assistance Mechanism or filed in courts.

Conclusion

Being a co-maker in the Philippines entails substantial responsibilities but also pathways for release through negotiation, payment, or legal means. Prospective co-makers should thoroughly assess risks and seek legal counsel before signing. For those seeking release, proactive communication with lenders and proper documentation are key to a successful outcome. Always consult a licensed attorney for personalized advice, as laws and practices evolve.