Below is a comprehensive, practice-oriented legal article on Collecting an Unpaid Loan Secured by a Promissory Note in the Philippines. It weaves together the relevant statutes, rules of procedure, jurisprudence, and best-practice strategy used by Philippine lenders, banks, micro-finance outfits, family lenders, and lawyers in 2025. It is not a substitute for individualized legal advice, but it should arm you (or your counsel) with every major concept, deadline, and tactical tool you will need.
1. Why focus on the promissory note (PN)?
A promissory note is both (a) the documentary proof of the underlying loan, and (b) a negotiable instrument governed by Act 2031 (Negotiable Instruments Law, “NIL”). Because it is in writing and signed by the maker, it places the claim among the “written contracts” that enjoy a 10-year prescriptive period under Art. 1144 (1) Civil Code. When properly drafted and, ideally, notarised, the PN is your strongest single piece of evidence.
2. Legal framework at a glance
| Source | Key Provisions |
|---|---|
| Civil Code | Arts. 1144, 1155 (10-yr prescription; interruption by demand); Arts. 1175-1180 (default); Arts. 1256-1271 (payment & consignation); Arts. 2047-2059 (guaranty & suretyship). |
| Negotiable Instruments Law (NIL) | §§ 1-3 (requisites of PN), §§ 70-171 (presentment, notice, discharge, defenses). |
| Rules of Court (as revised 2019) | Rules 2, 6 & 14 (pleadings & service); Rule 57 (Attachment); Rule 60 (Replevin); Rule 39 (Execution). |
| A.M. 08-8-7-SC (Small Claims) | Jurisdiction up to ₱400,000 exclusive of interest & costs (last raised by the Supreme Court’s April 2022 amendment). |
| Barangay Justice (R.A. 7160, ch. VII) | Mandatory conciliation when parties reside in the same city/municipality and the claim ≤ ₱1 million unless an exception applies. |
| Bangko Sentral Circular 799 (2013) | Suspends Usury Law ceilings; interest must still be reasonable (recent SC cases cap punitive rates). |
| B.P. 22 & Art. 315 RPC | Criminal remedies if post-dated checks were issued or fraud induced the loan. |
3. Anatomy of a Philippine PN
- Unconditional promise to pay a sum certain in money;
- Payee and maker clearly named;
- Fixed or determinable date (or on demand);
- Signature of the maker (co-makers / accommodation parties enlarge the pool of solidary debtors);
- Optional—but highly recommended—notarization (makes it a public document and removes it from barangay jurisdiction for venue purposes).
Tip: If collateral is involved, execute a separate Chattel or Real-Estate Mortgage; the PN itself should stay “clean” to preserve negotiability.
4. Pre-litigation workflow
| Step | Purpose | Caveats |
|---|---|---|
| 1. Review note & computation | Confirm maturity, interest, penalties. | Re-compute using simple vs. compound interest per agreement; courts strike down unconscionable rates. |
| 2. Extrajudicial (written) demand | (a) Places debtor in default (Art. 1169 CC). (b) Interrupts prescription (Art. 1155). | Send by registered mail or courier with tracking; attach computation. |
| 3. Decide forum | Small Claims, regular civil, or ADR. | Barangay conciliation is mandatory unless an exception applies (e.g., notarised PN or parties > 10 km apart). |
| 4. Consider security measures | Preliminary attachment (Rule 57) to prevent dissipation of assets. | Need to post bond; must show at least one Rule 57 ground (e.g., debtor is about to abscond). |
5. Choosing the right judicial remedy
5.1 Small Claims (A.M. 08-8-7-SC)
- Jurisdictional amount: ≤ ₱400,000 (exclusive of interest, penalties & costs).
- No lawyers in appearance; forms are templated.
- One-day hearing, same-day decision; judgment is immediately final (no appeal).
- Execution: Clerk of court issues writ of execution; sheriff can garnish salaries, bank deposits, or seize personal property.
Practical call: Even if the claim is bigger, you may waive the excess to fit under ₱400k and enjoy speed.
5.2 Ordinary civil action for sum of money
- When to file: >₱400k outside Metro Manila or >₱2 M within NCR; or where you need complex relief (e.g., foreclosure + damages).
- Venue: Where plaintiff resides or where defendant resides at plaintiff’s election (Art. 50 NCC; Rule 4).
- Pleadings: Complaint, Verification & Certification against forum shopping, proposed summons.
- Provisional remedies: Attachment (Rule 57), Replevin (Rule 60) if collateral in debtor’s possession.
5.3 Summary procedure (MTC claims ₱400k–₱2 M inside NCR)
Faster than full trial; certain pleadings are prohibited; judgments are appealable to RTC.
6. Criminal leverage (optional)
| Statute | When it applies | Key elements |
|---|---|---|
| B.P. 22 | Debtor issued a check (usually post-dated) that bounced upon presentment. | (1) Check drawn, (2) knowledge of insufficiency, (3) bank demand within 90 days unpaid for 5 banking days. |
| Estafa, Art. 315 (1)(b) | Debtor obtained loan by deceit or converted money/property. | Must prove deceit at inception OR conversion after obligation to return. |
Important: Criminal case does not erase civil liability; but acquittal under B.P. 22 may hinge on absence of deceit, not payment.
7. Prescription & demand subtleties
| Instrument | Prescriptive period | When clock starts |
|---|---|---|
| PN payable on a fixed date | 10 yrs | Day after maturity. |
| PN payable on demand | 10 yrs | From actual demand; however, courts presume demand within a “reasonable time,” so do not delay. |
| Action vs. endorser/indorser | 1 yr (NIL § 84) if proper presentment & notice of dishonor are required. | Runs from date of notice. |
Extrajudicial demand interrupts prescription and re-starts the 10-year clock (Art. 1155).
8. Defenses typically raised by debtors
- Lack or failure of consideration (e.g., loan never released).
- Material alteration of PN terms without consent.
- Prescription—often defeated by showing demand letters.
- Usurious/unconscionable interest rates—courts may reduce or strike interest but still award principal.
- Forgery or lack of authority—burden shifts once authenticity denied under oath per Rule 8 § 8.
9. Interest & penalty charges: navigating the “reasonableness” test
- Bangko Sentral Circular 799 suspended statutory ceilings, but SC will strike rates “iniquitous, unconscionable, and shocking to the conscience.” Recent cases slash 5%-10% per month rates down to a 6% per annum statutory rate (applied to the outstanding balance from date of judicial demand).
- Penalty interest is likewise subject to reduction. Always plead alternative computations.
10. Evidence bundle for trial or small claims
| Exhibit | Why it matters |
|---|---|
| Original PN (or certified copy) | Best evidence rule; production allows opposing inspection. |
| Proof of loan release (deposit slips, cash voucher) | Rebuts “no consideration” defense. |
| Demand letters & registry receipts | Show default; interrupt prescription. |
| Computation sheet & affidavit of creditor-accountant | Lay foundation for interest calculations. |
| ID & signatures of debtor (KYC docs) | Authenticate maker’s handwriting if denied. |
| Notarization page & notary log certification (if any) | Converts PN to public document; self-authenticating. |
11. Secured loans: foreclosure vs. collection
- Chattel Mortgage: Extrajudicial foreclosure under Sec. 14 Chattel Mortgage Law requires notice and auction; deficiency still collectible via civil action.
- Real Estate Mortgage: Choose judicial or extrajudicial foreclosure (Act 3135). Deficiency judgment can be merged in the same proceeding or pursued separately.
- Pacto de retro schemes are often re-characterized as equitable mortgages—leading the creditor back to ordinary collection.
12. Execution of judgment
- Motion for issuance of writ (Rule 39 § 1) once decision final.
- Sheriff levies personalty first, then realty; garnishment of salaries and bank accounts under § 9(c).
- Third-party claims are common; require indemnity bond.
- Exemption list (Art. 155 CC; Rule 39 § 13) protects basic essentials.
- Post-judgment interest: 6 % p.a. computed on adjudicated amount from finality until full satisfaction.
13. Tax & documentary stamp angles
- Documentary Stamp Tax: ₱1.50 for every ₱200 (or fraction) over ₱5,000, payable at or before issuance (Sec. 179 NIRC). Late DST triggers surcharges and compromise penalties but does not nullify the note.
- Withholding Tax on Interest: Applies to institutional lenders; private loans generally exempt unless lender is engaged in business.
14. ADR and collection agencies
- Mediation/Arbitration: Commercial parties often insert ADR clauses; enforcement of arbitral awards follows Special ADR Rules (A.M. 07-11-08-SC).
- Collection agencies: Must register with SEC (Financing Company Act) and are regulated by the BSP when collecting for banks (see BSP Circular 454, 2004). Agencies may not threaten criminal prosecution or privacy-invading tactics under R.A. 10173 (Data Privacy Act).
15. Practical creditor checklist (2025 edition)
- Never rely on an oral promise—get even small family loans in writing.
- Demand early, in writing, by registered mail; interruption of prescription is gold.
- Compute interest conservatively; be prepared to accept the court’s 6 % per annum fallback.
- Choose the fastest forum—often Small Claims or Summary Procedure; waive excess if practical.
- Secure collateral separately; keep the PN uncluttered.
- Preserve debtor contact data & employment info—critical for execution via garnishment.
- Budget for sheriff’s expenses & attachment bonds; winning judgment is only half the battle.
- Monitor legislative updates—the Supreme Court periodically raises the Small Claims cap and adjusts filing fees.
16. Conclusion
Collecting on a Philippine promissory note is procedure-driven but creditor-friendly once you master the timelines and choose the correct procedural track. The ten-year prescriptive window, combined with provisional remedies like attachment, gives lenders ample leverage. What stalls most collections is inaction—delayed demand, failure to interrupt prescription, and under-utilization of speedy forums such as Small Claims or barangay conciliation. Follow the roadmap above, keep meticulous paper trails, and you will dramatically improve both the speed and rate of recovery of unpaid loans.
This article synthesizes current Philippine law as of July 10 2025 and recent Supreme Court circulars. Always verify if new amendments (especially to the Small Claims amount and interest jurisprudence) have taken effect before filing your case.