Introduction

In the Philippine financial landscape, debt collection remains a critical aspect of credit management, particularly for loans that have been written off by lenders. Written-off loans refer to debts deemed uncollectible and removed from the lender's balance sheet for accounting purposes, often after prolonged delinquency. However, this accounting treatment does not extinguish the borrower's legal obligation to repay. Simultaneously, claims involving excessive interest—where rates exceed legally permissible limits—frequently intersect with debt collection efforts, raising issues of usury, fairness, and consumer protection. This article explores the legal framework governing these matters under Philippine law, including relevant statutes, jurisprudence, and regulatory guidelines from the Bangko Sentral ng Pilipinas (BSP) and the Securities and Exchange Commission (SEC). It delves into the processes, rights, remedies, and limitations involved, providing a comprehensive overview for lenders, borrowers, and legal practitioners.

Legal Basis for Debt Collection in the Philippines

Debt collection in the Philippines is primarily governed by the New Civil Code (Republic Act No. 386), which outlines obligations and contracts. Under Article 1156, an obligation arises from law, contracts, quasi-contracts, acts or omissions punished by law, and quasi-delicts. Loans, as contracts, create a creditor-debtor relationship where the borrower is bound to repay the principal plus agreed-upon interest (Article 1956).

The Rules of Court, particularly those on civil actions for collection of sums of money (Rule 69), provide procedural mechanisms for enforcement. Lenders may file a complaint in the appropriate Regional Trial Court or Metropolitan Trial Court, depending on the amount involved. For smaller claims (up to PHP 400,000 in Metro Manila or PHP 300,000 elsewhere as of the latest adjustments), small claims courts offer expedited proceedings without the need for lawyers.

Regulatory oversight falls under the BSP for banks and quasi-banks, the SEC for financing companies, and the Cooperative Development Authority for cooperatives. The Financial Consumer Protection Act (Republic Act No. 11765, enacted in 2022) strengthens consumer rights by mandating fair, transparent, and non-abusive collection practices. This law prohibits harassment, threats, or deceptive tactics in debt recovery, aligning with global standards like those in the U.S. Fair Debt Collection Practices Act, though tailored to Philippine contexts.

Written-Off Loans: Definition and Implications

A written-off loan is an accounting entry where a financial institution charges off a debt as a loss, typically after 90-180 days of non-payment, per BSP Circular No. 941 (2017) on credit risk management. This is not synonymous with debt forgiveness; it merely reflects the loan's status for tax and regulatory purposes under the National Internal Revenue Code (Republic Act No. 8424, as amended). Section 34(E) allows deductions for bad debts if they are ascertained to be worthless and charged off within the taxable year.

Legally, the debt remains enforceable unless barred by prescription. The prescriptive period for written contracts is 10 years from the date the cause of action accrues (Civil Code, Article 1144). For oral agreements, it is 6 years (Article 1145). Thus, even after write-off, creditors can pursue collection through judicial or extrajudicial means, provided the action is filed within the prescription period.

In practice, banks often sell written-off portfolios to asset management companies or collection agencies at a discount. These third-party collectors must comply with data privacy laws under the Data Privacy Act (Republic Act No. 10173), ensuring that personal information is handled securely and with consent. Violations can lead to penalties from the National Privacy Commission.

Jurisprudence, such as in Development Bank of the Philippines v. Court of Appeals (G.R. No. 129471, 2000), affirms that write-off does not equate to condonation. The Supreme Court held that accounting entries do not alter substantive rights unless explicitly intended as forgiveness under Article 1270 of the Civil Code.

Debt Collection Practices and Prohibitions

Collection strategies include demand letters, phone calls, visits, and legal action. However, the Financial Consumer Protection Act imposes strict guidelines:

Prohibited Acts: Collectors cannot use obscene language, threaten violence or criminal action (unless grounded in law), contact debtors at unreasonable hours (before 8 AM or after 9 PM), or disclose debt details to unauthorized parties. Harassment via repeated calls or messages violates Republic Act No. 10175 (Cybercrime Prevention Act) if conducted online.
Third-Party Collectors: Agencies must be accredited by the BSP or SEC. BSP Circular No. 1133 (2021) requires disclosure of agency status in communications and prohibits misrepresentation as legal authorities.
Extrajudicial Remedies: For secured loans, foreclosure under the Real Estate Mortgage Law (Act No. 3135) or chattel mortgage under the Chattel Mortgage Law (Act No. 1508) allows sale of collateral without court intervention. Proceeds apply to the debt, with surplus returned to the borrower.
Judicial Collection: Involves summons, trial, and execution. If the debtor is insolvent, the Insolvency Law (Act No. 1956) may apply, prioritizing creditors.

Borrowers' defenses include payment (with receipts as evidence under Article 1232), novation (Article 1291), or compromise (Article 2028). In cases of force majeure, such as during the COVID-19 pandemic, Republic Act No. 11469 (Bayanihan to Heal as One Act) and its sequel provided moratoriums on payments, temporarily suspending collection.

Excessive Interest Claims: Usury and Legal Limits

Historically, the Usury Law (Act No. 2655) capped interest at 12% per annum for secured loans and 14% for unsecured. However, Central Bank Circular No. 905 (1982) suspended these ceilings, allowing market-driven rates. This deregulation was upheld in Banco Filipino Savings and Mortgage Bank v. Court of Appeals (G.R. No. 129227, 2000), where the Supreme Court ruled that parties can stipulate interest freely, absent fraud or unconscionability.

Nonetheless, limits persist:

Stipulated Interest: Must be reasonable. Courts may reduce "iniquitous or unconscionable" rates under Article 1306 and Article 1409 of the Civil Code. In Spouses Silos v. Philippine National Bank (G.R. No. 181045, 2013), a 36% annual rate was deemed excessive and reduced to 12%.
Penalty Charges: Separate from interest, these compensate for delinquency. BSP guidelines cap penalties at 3% per month, but total effective rates (interest + penalties + fees) are scrutinized under the Truth in Lending Act (Republic Act No. 3765), requiring full disclosure of finance charges.
Compounding: Interest on interest is allowed if stipulated (Article 1959), but excessive compounding can be voided as contrary to public policy.

For non-bank lenders like lending companies, the Lending Company Regulation Act (Republic Act No. 9474) and SEC Memorandum Circular No. 3 (2019) mandate registration and rate transparency. Microfinance institutions under the Microfinance NGOs Act (Republic Act No. 10693) face similar scrutiny.

In debt collection, excessive interest claims can invalidate portions of the debt. Borrowers may file counterclaims for refund of overpayments under Article 1413, or seek annulment of the contract if rates are usurious. The Consumer Act (Republic Act No. 7394) protects against deceptive practices, allowing damages.

Intersection of Written-Off Loans and Excessive Interest

When collecting written-off loans, excessive interest often becomes contentious. Lenders may accrue interest post-write-off, but if rates are deemed excessive, courts can recalibrate. In Asian Cathay Finance and Leasing Corporation v. Gravador (G.R. No. 186550, 2010), the Court voided escalated interest on a delinquent loan, emphasizing equity.

Tax implications arise: Interest income from collected written-off loans is taxable, but deductions for bad debts require proof of uncollectibility. Borrowers claiming excessive interest can deduct only legal rates for tax purposes.

Regulatory enforcement includes BSP's consumer complaint mechanisms and the SEC's adjudication for financing firms. Violations can result in fines up to PHP 1 million or license revocation.

Remedies and Protections for Borrowers

Borrowers facing aggressive collection can:

Seek injunctions against harassment (Rules of Court, Rule 58).
File complaints with the BSP's Consumer Assistance Mechanism or the Department of Trade and Industry.
Invoke the Anti-Money Laundering Act (Republic Act No. 9160, as amended) if collection involves illicit funds, though rare.
For excessive interest, petition for reformation of contract (Article 1359).

Class actions are possible under Rule 3, Section 12 of the Rules of Court for widespread abuses.

Challenges and Emerging Trends

Challenges include informal lending ("5-6" schemes) with exorbitant rates, often unenforceable due to lack of documentation but leading to extralegal collection. The rise of online lending apps has prompted BSP Circular No. 1133 and SEC Circular No. 10 (2019), regulating digital platforms to curb predatory practices.

Post-pandemic, Republic Act No. 11523 (Financial Institutions Strategic Transfer Act) facilitates transfer of non-performing assets, potentially increasing collection activities on written-off loans. Jurisprudence continues to evolve, with emphasis on balancing creditor rights and debtor protection amid economic pressures.

Conclusion

Debt collection on written-off loans and excessive interest claims in the Philippines intertwine contractual obligations, regulatory compliance, and judicial equity. While lenders retain enforcement rights, borrowers are safeguarded against abuse through a robust legal framework. Understanding these dynamics is essential for ethical financial practices, ensuring that credit extension fosters economic growth without exploitation.