Introduction

In the Philippines, collecting an unpaid debt is a common legal challenge faced by individuals and businesses alike. Whether the debt arises from a personal loan, unpaid services, or a business transaction, the legal framework provides structured mechanisms to recover what is owed. The process typically begins with amicable efforts, such as sending a demand letter, and escalates to judicial remedies if necessary. For smaller amounts, the small claims court offers an efficient, cost-effective avenue. Throughout, the role of evidence is crucial in substantiating the claim. This article explores these elements in detail, drawing from Philippine laws such as the Civil Code, Rules of Court, and specific rules on small claims actions.

Under Philippine law, debts are governed primarily by the New Civil Code (Republic Act No. 386), which defines obligations and contracts. Article 1156 states that an obligation is a juridical necessity to give, to do, or not to do something. When a debtor fails to fulfill this, the creditor has the right to demand performance or seek damages. The process emphasizes fairness, due process, and the avoidance of unnecessary litigation, aligning with the judiciary's push for alternative dispute resolution.

The Role of Demand Letters in Debt Collection

A demand letter is the first formal step in collecting an unpaid debt. It serves as a written notice to the debtor, reminding them of the obligation and urging payment to avoid legal action. While not always mandatory, it is highly recommended and often required before filing a case, as it demonstrates good faith and can be used as evidence of the creditor's attempt to settle amicably.

Legal Basis for Demand Letters

The Civil Code, particularly Article 1169, implies that demand is necessary for the debtor to be in default (mora solvendi), unless the obligation is one where demand is not required (e.g., when the law or contract so provides). In practice, courts often look for proof of demand before entertaining collection suits. Republic Act No. 8792 (Electronic Commerce Act) allows demand letters to be sent electronically, provided they are authenticated.

Drafting an Effective Demand Letter

To draft a demand letter:

Header and Identification: Include the sender's (creditor's) full name, address, contact details, and date. Address it to the debtor with their full details.
Statement of Facts: Clearly describe the origin of the debt, such as the date of the loan, amount borrowed, terms of repayment (e.g., interest rate under the Usury Law or Bangko Sentral ng Pilipinas regulations), and any supporting documents like promissory notes or contracts.
Demand for Payment: Specify the exact amount due, including principal, interest (capped at legal rates; currently, the legal interest rate is 6% per annum under BSP Circular No. 799, Series of 2013, unless stipulated otherwise), and any penalties. Set a reasonable deadline for payment, typically 10-15 days.
Consequences of Non-Payment: Warn of potential legal actions, such as filing a small claims case or a regular civil suit, and mention possible costs like attorney's fees and court fees.
Closing: Sign the letter and indicate if copies are sent to relevant parties (e.g., witnesses).

The letter should be polite yet firm, avoiding threats that could constitute harassment under Republic Act No. 9262 (Anti-Violence Against Women and Their Children Act) or general criminal laws. Notarization is optional but adds weight, making it a public document under the Rules on Notarial Practice.

Sending the Demand Letter

Send via registered mail with return receipt, personal delivery with acknowledgment, or email with read receipt. Retain copies and proof of delivery, as these are vital evidence. If the debtor responds positively, negotiate a payment plan or settlement agreement, which can be formalized via a compromise agreement under Article 2028 of the Civil Code.

If ignored, the demand letter becomes prima facie evidence of the debt and the debtor's default, strengthening a subsequent court case.

Proceeding to Small Claims Court

If the demand letter fails, creditors can file a small claims action for debts up to PHP 1,000,000 (as amended by Supreme Court Administrative Matter No. 08-8-7-SC, effective 2022, with periodic adjustments). This is ideal for straightforward money claims without complex issues.

Jurisdiction and Eligibility

Small claims courts are under the Metropolitan Trial Courts (MeTC), Municipal Trial Courts (MTC), or Municipal Circuit Trial Courts (MCTC). Jurisdiction is based on:

The amount claimed (exclusive of interest, damages, attorney's fees, etc.).
The residence of the parties or where the obligation arose.

Claims involving real property or those requiring evidentiary hearings beyond affidavits are excluded. Corporate entities can file, but representation by lawyers is prohibited to keep it simple and inexpensive.

Filing Procedure

Preparation: Fill out the Statement of Claim form (available from the court or online via the Judiciary's e-filing system). Include details of the debt, supporting documents, and the demand letter.
Filing: Submit to the appropriate court with a filing fee (minimal, around PHP 1,000-5,000 depending on amount). No need for a lawyer; the process is pro se (self-represented).
Service: The court serves the summons and claim to the debtor, who must respond within 10 days.
Hearing: A single hearing is held where parties present evidence. The judge facilitates mediation first; if unsuccessful, decides based on submissions.
Decision: Rendered immediately or within 30 days, enforceable like regular judgments.

The Revised Rules on Small Claims (A.M. No. 08-8-7-SC) emphasize speed: no postponements, no formal pleadings, and decisions are final and executory, with limited appeals only on questions of law to the Regional Trial Court.

Common Challenges

Debtor's Defenses: Debtors may claim prescription (4 years for oral contracts, 10 for written under Article 1144-1155, Civil Code), payment, or invalidity of the debt.
Counterclaims: Allowed if within the jurisdictional amount.
Enforcement: If the debtor doesn't pay, seek a writ of execution to seize assets via sheriff.

The Crucial Role of Evidence in Debt Collection

Evidence is the backbone of any debt collection effort, proving the existence, amount, and default of the obligation. Under the Rules of Evidence (A.M. No. 19-08-15-SC), evidence must be relevant, competent, and admissible.

Types of Evidence

Documentary Evidence:
- Promissory notes, IOUs, or contracts (original or authenticated copies).
- Receipts, invoices, or ledgers showing the transaction.
- The demand letter and proof of delivery.
- Bank statements or transfer records for payments made.
Best evidence rule (Rule 130) requires originals, but secondary evidence is allowed if originals are lost.
Testimonial Evidence:
- Affidavits from the creditor or witnesses detailing the agreement and default.
- In small claims, affidavits suffice; no cross-examination unless ordered.
Object or Real Evidence:
- Rarely used, but could include goods delivered if the debt relates to sales.
Electronic Evidence:
- Under the Electronic Commerce Act and Rules on Electronic Evidence, emails, text messages, or digital contracts are admissible if authenticated (e.g., via digital signatures or affidavits).

Gathering and Preserving Evidence

Document everything from the start: use written agreements over verbal ones to avoid parole evidence rule issues (Article 1403, Civil Code).
Keep records organized: timestamps, signatures, and witnesses strengthen validity.
In case of partial payments, issue receipts to update the balance and interrupt prescription.
For businesses, comply with Data Privacy Act (Republic Act No. 10173) when handling personal data in evidence.

Presenting Evidence in Court

In small claims, submit all evidence with the claim. The judge evaluates based on preponderance of evidence (civil standard), meaning the claim is more likely true than not. Weak evidence can lead to dismissal, so completeness is key.

Special Considerations

Interest and Damages: Claim legal interest from demand date. Moral or exemplary damages if bad faith is proven (Article 2208, Civil Code).
Attorney's Fees: Recoverable if stipulated or if the debtor acted in gross bad faith.
Prescription and Laches: Act promptly; delays can bar claims.

Alternative Remedies and Considerations

Beyond small claims, for larger debts or complex cases, file a regular civil action for sum of money in the Regional Trial Court. Barangay conciliation is mandatory for claims under PHP 200,000 involving residents of the same city/municipality (Katarungang Pambarangay Law, Republic Act No. 7160).

Criminal remedies exist for estafa (Article 315, Revised Penal Code) if fraud is involved, or bouncing checks under Batas Pambansa Blg. 22. However, these are separate from civil collection.

Debt collection agencies can assist but must comply with anti-harassment laws. Self-help remedies like repossession are limited and risky without court order.

In summary, collecting unpaid debts in the Philippines balances amicable resolution with judicial enforcement, with demand letters setting the stage, small claims providing quick relief, and solid evidence ensuring success. Creditors should prioritize documentation and timely action to maximize recovery.