Defenses Against Loan Repayment Demands in the Philippines

This article surveys the defenses—substantive and procedural—that a borrower (individual or corporate) may raise when confronted with a demand to pay a loan in the Philippines. It synthesizes core rules from the Civil Code, the Negotiable Instruments Law, remedial law principles, and widely applied jurisprudential doctrines.

1) First principles: what a creditor must prove

Before turning to defenses, remember the baseline. A creditor who sues must establish:

Existence of the loan (a contract of loan or forbearance of money);
Amount due (principal, interest, penalties—how computed);
Maturity/default (date due, or valid demand made, and non-payment); and
Standing/ownership of the claim (especially after an assignment or if suing on a negotiable instrument).

Any gap in those elements is itself a defense.

2) Substantive defenses (attack the claim itself)

2.1. No valid contract or vitiated consent

A loan is a contract. It can be void, voidable, or unenforceable if:

No consent, capacity, or authority. E.g., a corporate officer signed without board authority; an agent exceeded a special power of attorney; the signatory lacked capacity (minority, insanity).
Vices of consent: mistake, fraud (dolo), intimidation, violence, or undue influence.
Illicit or false cause. A loan disguising an illegal purpose can be void.

Practical angle: Ask for the board resolution/SPA and proof of authority. Many “small corporate loans” fail here.

2.2. Failure of consideration / absence of delivery

In a simple loan (mutuum), delivery (of money/thing) consummates the contract. If the lender never actually delivered the funds—or delivered less—there is partial or total failure of consideration.

2.3. Payment, performance, or satisfaction

Classic extinguishment modes:

Payment (including partial payments) and receipts;
Dation in payment (dación en pago)—property accepted in lieu of money;
Novation—a valid new obligation replacing the old (new terms, debtor, or creditor);
Remission/condonation—waiver/forgiveness by the creditor (often needs proof in writing if the debt is in writing);
Confusion/merger—debtor and creditor become the same person.

2.4. Tender and consignation (when the creditor refuses to accept)

If the creditor unjustifiably refuses payment, the debtor may tender payment and, upon refusal, consign the amount in court. Proper consignation discharges the obligation and stops interest/penalties from accruing. Strict compliance with notice and deposit requirements is essential.

2.5. Compensation (legal set-off)

If each party is both debtor and creditor of the other, and the obligations are due and demandable, compensation extinguishes both up to the concurrent amounts. This is potent against an assigned loan until the debtor receives notice of the assignment (after notice, compensation can operate only for pre-existing credits).

2.6. Interest and penalty defenses

Interest must be expressly stipulated in writing. Absent a written stipulation, only legal interest applies upon default or forbearance.
Unconscionable interest or penalties may be reduced or struck down. Courts routinely pare down iniquitous charges and reduce penalty clauses when they are excessive or when the principal has been substantially satisfied.
Interest-on-interest (anatocism) generally requires a new agreement after interest has accrued; unilateral capitalization is suspect.
Ambiguous computations are construed against the drafter (usually the lender).

2.7. Acceleration clauses and conditions precedent

Many loans accelerate “upon default.” Defenses include:

No default yet: grace periods, required prior notice of default, or cure rights not honored;
Waiver or estoppel: the lender accepted late payments without protest;
Condition precedent not met: e.g., the contract requires a specific written demand, board approval, or notice before acceleration.

2.8. Defenses in secured loans

Real estate or chattel mortgages

Invalidity of the security: nonexistent ownership by mortgagor, defective description, lack of consideration, or lack of special authority for corporate mortgagors.
Non-compliance with foreclosure formalities: defects in posting, publication, or mailing of notices; wrong venue; failure to provide redemption information; or sale conducted by an unauthorized officer. Substantial defects can invalidate the sale or bar a deficiency claim.
Improper deficiency: if the sale price was depressed by irregularities, courts may deny or reduce any deficiency judgment.
Dragnet clauses: challenge overbreadth or lack of clear intent to secure other loans.

Pledge

Strict rules on sale and application of proceeds; non-compliance can release the debtor.

2.9. Assignment and negotiable instruments

Assigned loans (non-negotiable)

Debtor may raise all defenses against the assignee that he could raise against the original creditor if they arose before notice of assignment (e.g., payment, set-off, fraud).

Promissory notes / checks (Negotiable Instruments Law)

Against a holder in due course, only real defenses (e.g., forgery, fraud in factum, material alteration, lack of capacity, illegality rendering the instrument void) are available; personal defenses (failure of consideration, simple fraud) are cut off.
If the plaintiff is not a holder in due course, all defenses are available.

2.10. Prescription (statute of limitations) and laches

Written contracts: actions typically prescribe in ten (10) years from breach (e.g., due date or valid demand if payable on demand).
Oral contracts / quasi-contracts: generally six (6) years.
Checks (civil actions) follow the underlying obligation; criminal is separate.
Interruption of prescription: written acknowledgment, partial payment, or filing suit.

2.11. Illegality and regulatory non-compliance

Unlicensed lenders or non-compliance with mandatory disclosures can support defenses or counterclaims (e.g., for damages or administrative liability), and may affect enforceability of certain charges.
Consumer-facing micro-lenders and financing/lending companies are subject to disclosure, collection, and data-privacy rules. Breaches may not automatically void the principal but can undermine penalties/fees and sustain damages.

2.12. Equitable defenses

Estoppel/waiver, clean hands, bad faith, or abuse of rights (Art. 19–21 Civil Code) where collection practices are oppressive or deceptive.
Laches (unreasonable delay causing prejudice) can supplement prescription defenses.

3) Procedural defenses (attack the lawsuit or demand)

3.1. Prematurity and improper demand

Not yet due or no valid demand where the contract requires one.
Conditional obligations where the suspensive condition has not occurred.

3.2. Lack of cause of action / defective pleadings

Complaint fails to attach actionable documents (e.g., the note, loan agreement, mortgage).
Variance between allegations and exhibits (amounts, dates, parties).

3.3. Parties and standing

Wrong plaintiff (assignee without proof of assignment; special purpose vehicle lacking chain of title).
Indispensable parties not joined (e.g., co-makers, spouses when conjugal property is implicated).
No authority of signatory bringing suit for a corporation.

3.4. Venue and jurisdiction

Stipulated venue not followed (if valid), or suit filed in the wrong RTC/MTC based on amount or nature; improper service of summons (voiding default).

3.5. Arbitration/mediation clauses

Motion to refer to arbitration or to compel mediation as contractually required; stay of proceedings pending ADR.

3.6. Provisional remedies and how to oppose them

Writs of replevin/attachment: oppose via counter-bond, attack lack of grounds, or defects in affidavits/bonds.

4) Interest, fees, and damages: how to pare them down

When liability cannot be fully avoided, quantum reduction often wins the day:

Seek re-computation: start and end dates, application of partial payments, correct interest base (simple vs capitalized), and exclusion of unauthorized fees.
Urge the court to reduce penalties under the Civil Code when unconscionable or when the creditor is partly at fault (e.g., irregular foreclosure).
On judgment, post-judgment legal interest applies at the prevailing legal rate on the adjudged amount, replacing contractual rates unless the court specifies otherwise.

5) Special contexts

5.1. Corporate borrowers and sureties

Ultra vires loans (beyond corporate purpose) are rare today but still argued; stronger are lack of board approval or by-laws violations.
Surety/guaranty defenses: strictly construed; material alterations or extensions without consent may release the surety; spousal consent issues can arise on conjugal assets.

5.2. Consumer loans and collection practices

Disclosure failures (true cost of credit, hidden charges).
Harassing or shaming tactics (e.g., contact scraping, public posting) can violate data privacy and unfair collection rules—supporting counterclaims for damages and regulatory complaints.
Unauthorized access or disclosure of borrower data can trigger liability under data-privacy principles.

5.3. Insolvency and rehabilitation (FRIA framework)

Court-approved rehabilitation or suspension of payments triggers a stay order that halts collection suits, enforcement of judgments, and foreclosure (subject to statutory exceptions). Violations are void or voidable.

6) Evidence playbook for borrowers

Source docs: loan agreement, promissory notes, disclosure statements, board resolutions/SPA, mortgages/pledges, assignments/SPV sale documents.
Money trail: bank proofs of actual disbursement and all payments (including small/partial).
Communications: demand letters, emails, text messages showing waivers, indulgence, or revised terms.
Computation sheets: your own re-computation showing correct principal, interest, penalties, dates.
Regulatory compliance: licensing/registration of lender, privacy notices, consent forms, collection scripts.
Foreclosure papers: notices, affidavits of posting/publication, sheriff’s reports, certificates of sale.

7) Strategy against a demand letter (pre-litigation)

Map the defenses above and choose a coherent theory (don’t assert mutually destructive narratives).
Ask for documents: full accounting, copies of assignments, proof of authority of signatories, and computation logic (rates, bases, dates).
Offer tender (if appropriate) and, when rebuffed, consign to stop interest.
Propose restructure or dación conditioned on a complete release.
Preserve evidence of collection misconduct for damages and regulatory remedies.

8) Common pitfalls

Admitting the debt in writing while negotiating—this can interrupt prescription.
Ignoring acceleration notices that require quick cures.
Paying third parties without verifying assignment and authority.
Relying on oral changes to written loans—novation requires clear proof; interest changes generally need written agreement.

9) Remedies and countermeasures

Declaratory relief when terms are disputed but suit has not been filed.
Injunction to stop a defective foreclosure.
Damages for abusive collection or wrongful foreclosure (actual, moral, exemplary, attorney’s fees).
Administrative complaints (e.g., against erring lending/financing companies) alongside civil defenses.

10) Checklist: quick issue-spotter

Is there proof of actual delivery of funds?
Is the signatory authorized (board resolution/SPA)?
Is interest/penalty valid, written, and reasonable?
Has the creditor computed correctly (dates/base/partial payments)?
Is the claim prescribed or barred by laches?
Was demand or acceleration properly invoked?
Is there set-off or prior novation/remission?
For secured loans: were foreclosure formalities observed and is the deficiency proper?
Is the plaintiff the true owner of the claim with notice of assignment served?
Do ADR clauses require arbitration/mediation first?
Are there grounds for consignation, injunction, or rehabilitation stay?

11) Final notes

Many disputes turn on paperwork and arithmetic, not just legal theory: authority, delivery, computation, and procedure.
Even when liability exists, courts regularly recalibrate interest and penalties and disallow defective deficiency claims.
The strongest defenses are those you can prove with documents you already have—or can compel the creditor to produce.

This article provides general information for the Philippine context. For a specific matter, assess facts and documents against the defenses above and tailor a strategy accordingly.