Enforcing Loan Agreements in the Philippines: Legal Remedies for Non-Payment

In the Philippines, loan agreements—whether formal contracts with banks, informal lending between individuals, or financing arrangements with lending companies—are governed primarily by the Civil Code and are treated as consensual contracts perfected by mere consent. When a borrower defaults, the lender’s ability to recover depends on the nature of the loan (secured or unsecured), the documentation, and compliance with substantive and procedural laws. This article exhaustively discusses all available remedies, procedural paths, prescriptive periods, and practical considerations under Philippine law as of December 2025.

I. Legal Nature of the Loan Contract

1. Simple Loan (Mutuum) – Articles 1933–1952, Civil Code
   The borrower is obliged to return the same amount (if money) or equivalent kind, quality, and quantity (if fungible things), plus stipulated interest. Ownership passes to the borrower upon delivery.

2. Interest-Bearing vs. Non-Interest-Bearing
   Interest must be expressly stipulated in writing (Art. 1956). If not stipulated in writing, no interest is due except legal interest (currently 6% per annum pursuant to BSP Circular No. 799 s. 2013, as modified by Circular No. 1098 s. 2020 and subsequent issuances).

3. Usury Law Repealed
   Central Bank Circular No. 905 (1982) suspended the Usury Law (Act No. 2655). Interest rates are now left to the parties, but courts may reduce exorbitant or unconscionable rates under Article 1229 (penalty clause) or Article 1308 (mutuality) of the Civil Code, or declare them void under Republic Act No. 7394 (Consumer Act) or Republic Act No. 3765 (Truth in Lending Act) for non-disclosure.

II. Prescription of Actions

• Written contract (most loan agreements): 10 years from the date the cause of action accrues (Art. 1144, Civil Code).
• Oral loan: 6 years (Art. 1145).
• Action upon a quasi-delict (e.g., fraudulent inducement): 4 years.
• Foreclosure of REM: 10 years from default or maturity (even if note prescribes, mortgage subsists – see GSIS v. CA, G.R. No. 183905, April 16, 2009, reiterated in subsequent cases).
• The 10-year period for foreclosure is counted from the time the mortgagor defaults, not from inscription.

III. Extrajudicial Remedies (Before Filing Suit)

1. Demand Letter
   Not always required substantively, but highly advisable. For loans payable on demand, demand is necessary to trigger default and interest accrual.

2. Notarization of the Contract
   While not required for validity of the loan itself, a notarized promissory note or contract constitutes an executable document under Rule 39, Sec. 19 of the Rules of Court and can be enforced via motion for execution after 5 years from finality (if no appeal taken).

3. Dation in Payment (Dación en Pago)
   Borrower conveys property in full satisfaction of the debt (Art. 1245). Requires mutual agreement.

4. Novation, Compensation, or Confusion
   May extinguish the obligation without litigation.

IV. Judicial Remedies for Unsecured Loans

A. Action for Collection of Sum of Money

1. Small Claims (if ≤ PHP 1,000,000)

   • A.M. No. 08-8-7-SC as amended by OCA Circular No. 45-2024 (effective April 1, 2024).
   • Limit is now PHP 1,000,000 exclusive of interest and costs.
   • Purely money claims; strictly no declaratory relief or foreclosure.
   • Procedure is expeditious: one hearing only, decision within 30 days.
   • Appealable to RTC via petition for review under Rule 42.

2. Summary Procedure (PHP 1,000,001 – PHP 2,000,000)
   Revised Rules on Summary Procedure as amended.

3. Ordinary Civil Action (above PHP 2,000,000 or with complex issues)
   Venue: residence of plaintiff or defendant, at plaintiff’s election (Rule 4, Sec. 2).

B. Attachment (Rule 57, Rules of Court)

Preliminary attachment is available upon showing that the debtor is about to abscond, fraudulently dispose of property, or has committed fraud in contracting the debt.

C. Accrual of Installment Payments

In installment loans, default in one installment does not automatically accelerate the entire loan unless there is an explicit acceleration clause that is automatic and self-operating (Palma v. CA, G.R. No. 110681, Feb. 6, 1997).

V. Judicial Remedies for Secured Loans

A. Real Estate Mortgage (REM)

1. Judicial Foreclosure (Rule 68, Rules of Court)
   Always available. Results in deficiency judgment recoverable in the same case.

2. Extrajudicial Foreclosure (Act No. 3135 as amended)
   Faster and cheaper. Requires special power of attorney inserted in the mortgage contract or separate notarized document.

   • No deficiency judgment recoverable if the creditor is a bank or banking institution (Sec. 47, General Banking Law; see also RA 11313 or subsequent amendments).
   • For non-bank creditors, deficiency is recoverable via separate action.
   • Redemption period: 1 year from registration of sale (even if borrower is a juridical person – Goldenway Merchandising v. Equitable PCI Bank, G.R. No. 195540, March 13, 2013).

B. Chattel Mortgage (Act No. 1508 as amended by PD 761 and RA 11057)

• Extrajudicial foreclosure by public or private sale.
• No right of redemption once sold (unlike REM).
• Deficiency recoverable unless prohibited by RA 11057 (Personal Property Security Act) in certain cases.

C. Pledge (Arts. 2085–2123, Civil Code)

• Foreclosure by public auction only after demand and reasonable notice (Art. 2112).
• Pactum commissorium strictly prohibited and void.

D. Antichresis (Arts. 2132–2139)

Rarely used. Creditor acquires right to receive fruits of immovable with obligation to apply them to interest and principal.

E. Personal Property Security Act (RA 11057, effective 2019)

Applies to all security interests in movable property (inventory, equipment, accounts receivable, etc.). Registry is with the Land Registration Authority (online PPSR). Greatly modernized secured transactions.

VI. Criminal Remedies

1. Estafa through Misappropriation or Deceit (Art. 315, Revised Penal Code)
   When the loan was obtained through false pretenses or post-dated checks were issued with deceit.

2. Bouncing Checks – Batas Pambansa Blg. 22
   Prima facie evidence of deceit if check is dishonored for insufficiency and no payment within 5 banking days from notice.
   Penalty is imprisonment or fine. Civil liability is separate and survives criminal acquittal if based on insufficiency (but not if acquitted on good faith).

3. Trust Receipts Law Violation (PD 115)
   When loan is under trust receipt agreement and entrustee fails to remit proceeds or return goods.

VII. Special Types of Lenders and Additional Rules

1. Banks and Quasi-Banks – Supervised by BSP. Single Borrower’s Limit, DOSRI rules, Truth in Lending Act disclosure mandatory. Foreclosure governed by General Banking Law (RA 8791).

2. Lending Companies and Financing Companies – RA 9474, RA 8556, RA 10884. Must register with SEC.

3. Pawnshops – PD 114 as amended. Loan period 30 days renewable; pawn ticket is prima facie evidence. Interest ceiling set by BSP.

4. Microfinance Institutions and Cooperatives – Special rules under RA 10693 (Microfinance NGOs), RA 9520 (Cooperatives Code).

5. Online Lending Platforms – SEC Advisory and Memorandum Circular No. 19 s. 2019. Harassment by collectors is punishable under RA 11766 (Online Lending Harassment Law, 2022).

VIII. Practical Considerations and Recent Jurisprudence (2020–2025)

• Electronic Promissory Notes and E-Notarization – Fully recognized under the Electronic Commerce Act (RA 8792) and Rules on Electronic Evidence. E-signatures under RA 8792 are equivalent to handwritten.

• Moratoriums and Bayanihan Laws – Expired. Mandatory grace periods during COVID-19 (RA 11469 & 11494) are no longer in force.

• Interest During Default – Continues to run at the stipulated rate until fully paid (Eastern Shipping Lines v. CA, G.R. No. 97412, July 12, 1994, still the leading doctrine as reaffirmed in Nacar v. Gallery Frames, G.R. No. 189871, Aug. 13, 2013, and Lara’s Gifts v. Midtown Industrial, G.R. No. 225433, Sept. 20, 2022).

• Attorney’s Fees – Recoverable only if stipulated or in cases of bad faith. Courts routinely award 10% as reasonable.

• Venue Stipulations – Generally upheld unless unconscionable.

IX. Conclusion

The Philippine legal system provides a robust arsenal for creditors: from simple small claims actions for modest unsecured loans to sophisticated secured transactions under RA 11057 and extrajudicial foreclosure. Success depends heavily on proper documentation at the inception of the loan—clear terms, notarization when advantageous, registration of security interests, and inclusion of enforceable acceleration and attorney’s-fee clauses. While the repeal of the Usury Law has given parties wide latitude on interest, courts remain vigilant against unconscionable stipulations and abusive collection practices. Creditors who observe both substantive and procedural requirements almost invariably recover their money, albeit sometimes after considerable time in judicial foreclosure cases.