Collecting Unpaid Debts from Individuals in the Philippines

A practical, Philippines-specific legal guide (for information only, not legal advice).

1) First principles you should know

No jail for unpaid debt. The Constitution prohibits imprisonment for non-payment of debt. What can be penalized are separate unlawful acts (e.g., issuing a worthless check under B.P. 22, or fraud/estafa)—not mere failure to pay.
Debt is a civil obligation. Claims typically arise from a contract (loan, sale of goods/services, credit card), quasi-contract, or law. Collecting is about enforcing a civil right to payment.
You need evidence. Courts and small-claims judges decide based on documents. Keep originals or certified copies of promissory notes, invoices, statements of account (SOAs), delivery receipts, chats/emails showing the agreement, and proof of demands and payments.
Demand is important. A written demand helps (1) place the debtor in legal delay (default), (2) start running of stipulated penalties/interest (if the contract says so), and (3) interrupt prescription (see §10).

2) What you can collect (and the limits)

Principal – the unpaid amount.
Interest
- Must be in writing to be enforceable as conventional interest.
- Courts reduce or strike down unconscionable rates (even if written).
- If there is no written rate, courts generally impose legal interest (commonly 6% per annum) from the time of demand or filing, subject to current jurisprudence. (Rates can change—always check the latest case law/circulars.)
- Compounding requires clear written agreement; otherwise assume simple interest.
Penalties/Liquidated damages
- Enforceable if agreed, but courts may reduce iniquitous or unconscionable penalties.
Attorney’s fees & costs
- Recoverable if (a) stipulated, or (b) justified by law (e.g., when the debtor’s act/omission compelled litigation). Courts fix the reasonable amount.
Moral/exemplary damages
- Awarded only if you prove bad faith, fraud, or wanton conduct by the debtor—not for mere non-payment.

3) Before you collect: due-diligence checklist

Identify the debtor correctly (full name, government ID, TIN if available) and where to find them (home/work addresses, email, phone).
Map the obligation
- Type (loan, sale on credit, services).
- Due dates; installments (each has its own due date).
- Payments/credits already made.
Compute the claim (principal + interest + penalties) and show your math in an attached SOA.
Check prescription (see §10).
Check security
- Is there a guarantor, surety, mortgage, or chattel mortgage?
- Is the security notarized/registered (real estate under Act 3135; chattels under Chattel Mortgage Law)? Registration matters for third-party effectiveness and foreclosure.
Check mandatory pre-suit conciliation (see §5).
Privacy & fairness (see §9): plan a lawful, non-harassing collection approach.

4) The demand letter (and why it matters)

A strong demand letter should:

Identify the parties and the basis of the debt (attach/quote key docs).
State the exact amount due, with computation (principal, interest, penalties) up to a specific date.
Give a clear deadline (e.g., 7–15 days) and where/how to pay.
Warn of next steps (small claims, civil action, foreclosure, provisional remedies).
Ask for written acknowledgement or payment plan if they cannot pay in full.
Be served in a verifiable way (courier with tracking, personal service with receiving copy, or email with read receipt). Tip: A written demand interrupts prescription and is excellent evidence.

5) Barangay conciliation (Katarungang Pambarangay)

Before suing, barangay conciliation is usually mandatory when:

Parties are natural persons who reside in the same city/municipality, and
The dispute is not among the statutory exceptions (e.g., where a party is a corporation, parties live in different cities/municipalities, cases requiring urgent legal action, etc.).

Outcome:

Amicable settlement (kasunduan) has force of a final judgment after the repudiation period lapses.
If no settlement, you get a Certification to File Action—a precondition to filing in court (where required).

6) Negotiation, restructuring, and settlement tools

Written payment plan with clear schedule, default clause, and acceleration.
Acknowledgment of debt (interrupts prescription).
Novation (replace the old obligation with a new one—be explicit).
Dación en pago (dation in payment): transfer property in lieu of cash.
Compromise agreement (may be notarized and later submitted for judgment upon compromise).
Set-off/compensation if both parties owe each other liquidated, demandable sums.

7) Litigation pathways

A. Small Claims (fast-track money claims)

What it covers: Purely money claims (loan, services, sale of goods, damages arising from these) against individuals.
Jurisdictional amount: Fixed by Supreme Court rules and periodically revised. Always verify the current peso limit before filing.
Key features:
- No lawyers appear for parties (with limited exceptions). Forms are simplified; evidence is documentary/affidavit-based.
- One-day hearing; decision is immediately executory. No appeal; only very narrow extraordinary remedies may be available.
- Barangay conciliation still applies where required.
Good for: Clear, paper-backed debts within the threshold when you want a quick, final judgment.

B. Regular Civil Action for Sum of Money

Where to file (venue): For personal actions, plaintiff’s or defendant’s residence at plaintiff’s option (if plaintiff is a Philippine resident).
Which court (jurisdiction by amount): Amount thresholds are statutory and were expanded in recent years (MTCs now handle higher amounts than before; RTCs handle the rest). Check the current peso cutoffs applicable on filing.
Core pleadings & practice points:
- Attach actionable documents (or plead their substance) if the claim is founded on one.
- Include a verified Certification against Forum Shopping.
- Expect Court-Annexed Mediation and Judicial Dispute Resolution in many courts.
- Use Summary Judgment if there is no genuine factual issue.
Provisional remedies (very useful in collection):
- Preliminary Attachment (Rule 57): Secure assets at the start if statutory grounds exist (e.g., debtor is about to abscond, dispose assets in fraud of creditors, is a non-resident, etc.). Requires bond and specific grounds.
- Replevin (Rule 60): To recover possession of a specific personal property (e.g., item sold on installment with chattel mortgage).
- Injunction/Receivership are rarer in pure money claims.

C. Arbitration & ADR

If the contract has an arbitration clause, courts will refer you to arbitration upon motion. Arbitral awards are enforceable through the Regional Trial Court after confirmation.

D. Secured-creditor routes (extra-judicial)

Real estate mortgage: Extrajudicial foreclosure under Act 3135 via notary public and sheriff auction; debtor has redemption rights (within the period and conditions set by law).
Chattel mortgage: Repossession and sale under the Chattel Mortgage Law (observe notice and sale requirements).

8) Enforcing a judgment (execution, levy, and garnishment)

After judgment becomes final (or is immediately executory in small claims), seek a Writ of Execution.
Levy on non-exempt personal/real property; garnish bank accounts and receivables.
Exemptions:
- Family home is generally exempt except for debts for its purchase, improvements, taxes, or as provided by law.
- Tools of trade, necessary wearing apparel, and certain personal property are exempt.
- Wages: The Civil Code protects laborers’ wages from execution except for debts for basic needs (food, shelter, clothing, medical attendance), among other limited cases.
- Foreign-currency deposits enjoy special statutory protection from garnishment.
Third-party claims: Sheriff stops sale if a third party claims ownership—creditor may be required to post an indemnity bond or file a separate action.
Post-sale deficiency: If sale proceeds are insufficient, you can pursue the deficiency against the debtor (unless law or contract says otherwise).

9) What not to do: fair collection, privacy, and consumer-protection rules

No harassment or shaming. Do not use threats, obscene language, or disclose the debt to friends/employers/relatives to shame the debtor. These can trigger civil/criminal or regulatory liability (e.g., under the Financial Consumer Protection framework and sectoral rules for lenders/collectors).
Respect data privacy. Collect, use, and disclose personal data only for legitimate, declared purposes; secure consent where needed; minimize recipients; secure the data. Abusive phone-scraping and mass messages to contacts can lead to complaints.
Accurate representations only. Don’t misstate amounts, add fees not agreed or allowed, or claim you have court orders when you do not.
B.P. 22 and estafa are not debt-collection tools. File criminal cases only if elements are present (e.g., a bounced check knowingly issued without sufficient funds, or fraud/misappropriation for estafa). Never threaten criminal charges lightly.

10) Prescription (statutes of limitation)

Written contracts / judgments / mortgages: typically 10 years.
Oral contracts / quasi-contracts: typically 6 years.
Injury to rights (torts): 4 years (less relevant in pure debt collection unless you’re suing for separate wrongful acts).
Installments: Each installment prescribes separately from its due date.
Demand loans: Prescription generally runs from demand (or refusal), and a written demand interrupts prescription. Always compute conservatively and keep all written demands/acknowledgments.

11) Guarantors, sureties, and solidary debtors

Joint vs. solidary debtors: Solidary (“joint and several”) means you can collect the entire debt from any solidary debtor.
Guarantor vs. surety:
- A guarantor benefits from excussion (you typically go after the principal debtor’s assets first).
- A surety is usually solidarily liable with the debtor—often as liable as the principal.
Check the wording of the undertaking; attach the guaranty/suretyship document to your pleadings.

12) Spouses and family property

A spouse’s personal debt does not automatically bind the community/conjugal property unless it redounded to family benefit or falls under statutory chargeable obligations.
Family home is generally protected (see §8).

13) Special notes on checks and credit cards

B.P. 22 (bouncing checks): Criminal liability focuses on the act of issuing a worthless check and statutory notice; separate from the civil debt. Courts frequently award civil liability alongside criminal convictions.
Credit-card debts: Contracts often have interest, penalties, and acceleration clauses. Courts examine reasonableness and may reduce unconscionable charges. Banks/financiers must follow fair collection and privacy rules.

14) Costs, timing, and strategy (what to expect)

Small claims: Filing fees scale with claim size; hearings are quick; decisions are final and immediately enforceable.
Regular cases: Expect months to years depending on complexity, defenses, court load, and appeals.
Security & provisional remedies: Increase leverage but require bonds and strict compliance.
Settlement is common. A well-documented claim plus realistic payment terms often beats a long trial.

15) Practical playbooks

A. Unsecured loan (no collateral), debtor still reachable

Issue polite but firm demand with computation and 10–15-day deadline.
If same city/municipality and both are natural persons, barangay conciliation first.
If no settlement:
- Small claims if within threshold; else civil action in the proper court.
Consider prelim. attachment only if statutory grounds exist.
After judgment: garnish accounts/receivables; levy on property; respect exemptions.

B. Sale of goods with delivery receipts; partial payments made

Prepare SOA showing deliveries and credits; attach DRs and acknowledgment.
Demand letter + barangay conciliation (as applicable).
Small claims (often ideal) or sum of money action.
Execution as above.

C. Chattel-mortgaged installment sale

On default, consider replevin to repossess the item, then foreclose and sell.
Apply proceeds to obligation; pursue deficiency if allowed.

D. Real estate mortgage (individual debtor)

Serve notice of default and extrajudicial foreclosure per Act 3135.
Observe publication and posting; conduct auction; debtor’s right of redemption applies by law.

16) Evidence tips that win cases

Notarization elevates private documents into public documents with stronger evidentiary weight (though not required for validity except for specific contracts).
Use business-records exceptions properly (SOAs, ledgers generated in regular course).
Electronic evidence (emails, messages, e-receipts): preserve original files, metadata, and authenticated printouts/screenshots; know the rules under the E-Commerce Act and the Rules on Electronic Evidence.
Keep a payment ledger, signed acknowledgments, and delivery proofs.

17) Ethical and compliant outsourcing of collections

If you hire a collection agency or law firm:
- Ensure written authority (Special Power of Attorney for individuals).
- Mandate no-harassment, no-shaming, and privacy-compliant methods.
- Supervise fees and no unauthorized add-ons.

18) Common pitfalls (and how to avoid them)

Letting prescription lapse. Send written demands; file on time.
Wrong venue/jurisdiction. Check residence and amount thresholds applicable on filing.
Skipping barangay conciliation when required—your case can be dismissed.
Missing actionable documents. Attach the contract/PN/DRs; authenticate them.
Overstating claims. Courts dislike padded interest/penalties and may reduce them (or deny attorney’s fees).
Harassing tactics. Can backfire with regulatory complaints, damages, or even criminal exposure.

19) Quick FAQs

Q: Can I sue both spouses for one spouse’s debt? A: You sue the debtor-spouse. Community/conjugal assets may be liable only in situations allowed by law (e.g., obligations benefiting the family). Otherwise, go after the debtor’s exclusive property.

Q: The debtor moved abroad—can I still sue? A: Yes, but service of summons becomes crucial (may require substituted/extraterritorial service). Enforcement abroad will need recognition/enforcement in the foreign jurisdiction.

Q: Can I garnish the debtor’s salary? A: Wages enjoy statutory protections; execution on wages is limited. Bank accounts and other assets are often more practical to garnish.

Q: What’s better—small claims or regular case? A: If your claim fits the small-claims cap, it’s usually faster and final. Larger or complex claims go to regular courts; consider attachment to secure assets.

20) Final reminders

Thresholds change. Small-claims limits, court jurisdictional amounts, and filing fees are periodically revised; verify the current figures where you file.
Interest and damages evolve. Legal interest and treatment of unconscionable rates are jurisprudential; check the latest guidance.
This is general information. Facts and documents decide outcomes. For significant sums or tricky facts (e.g., cross-border debtors, multiple co-debtors, secured obligations), consult a Philippine lawyer.

Minimal templates (adapt as needed)

A. Demand Letter skeleton

Parties & addresses
Basis of debt (attach/quote documents)
Amount due with computation to [Date]
Payment deadline and modes
Notice of next steps (barangay conciliation/suit/foreclosure)
Request for written acknowledgment/payment plan
Signature & enclosures; proof of service

B. Statement of Account (SOA)

Beginning balance
Itemized charges (dates, refs)
Payments/credits (dates)
Interest/penalty computation clauses cited
Total due as of [Date]; per-day accrual thereafter

If you want, tell me your scenario (amount, documents you have, and where you and the debtor live) and I’ll map the most efficient route (barangay vs. small claims vs. regular case) and draft a demand letter you can use.