How to Write a Demand Letter for an Unpaid Loan in the Philippines

Introduction

In the Philippine legal system, recovering an unpaid loan often begins with a formal demand letter. This document serves as an essential preliminary step in debt collection, notifying the borrower of their obligation and providing an opportunity for amicable settlement before escalating to judicial proceedings. Governed primarily by the Civil Code of the Philippines (Republic Act No. 386), particularly provisions on obligations and contracts, a well-drafted demand letter can strengthen a lender's position in court by establishing the debtor's delay (mora) and fulfilling requirements for accruing interest or damages. This article provides a comprehensive guide on crafting such a letter, tailored to the Philippine context, including its purpose, legal foundations, structure, and best practices.

Understanding the Demand Letter: Purpose and Legal Significance

A demand letter, also known as a letter of demand or dunning letter, is a written notice from the creditor (lender) to the debtor (borrower) formally requesting payment of an outstanding loan. It is not merely a reminder but a legal instrument that triggers certain rights and obligations under Philippine law.

Legal Basis in Philippine Law

Civil Code Provisions: Under Article 1169 of the Civil Code, a debtor incurs delay (mora solvendi) from the time the creditor judicially or extrajudicially demands fulfillment of the obligation. An extrajudicial demand, such as a letter, is sufficient to place the borrower in default, allowing interest to accrue from the date of demand if not already stipulated.
Loans and Contracts: Articles 1933 to 1961 define simple loans (mutuum), where money or fungible things are delivered with the obligation to return the same amount or kind. If the loan is documented via a promissory note or contract, the demand letter references these to enforce terms like repayment schedules, interest rates, and penalties.
Interest and Usury: While the Usury Law (Act No. 2655) was largely deregulated by Central Bank Circular No. 905 (1982), lenders must ensure interest rates are not unconscionable under Article 1409 (inexistent contracts) or Article 1957 (escalation clauses). The demand letter should specify accrued interest based on agreed rates or the legal rate of 6% per annum (per BSP Monetary Board Resolution No. 796, effective July 1, 2013, for loans without stipulation).
Relevance to Court Actions: For collection suits, a demand letter is often a prerequisite. In small claims cases (under A.M. No. 08-8-7-SC, for amounts up to PHP 1,000,000 as of 2022 amendments), proof of demand supports the claim. Failure to send one may lead to dismissal for lack of cause of action in some instances.
Other Laws: If the loan involves banks or financial institutions, Republic Act No. 3765 (Truth in Lending Act) requires disclosure of terms, which the demand letter can reference. For consumer loans, the Consumer Act (Republic Act No. 7394) protects against abusive collection practices.

When to Send a Demand Letter

Send the letter immediately after the due date passes without payment. It is advisable for:

Personal loans between individuals.
Business loans without collateral.
Loans with or without promissory notes.
Situations where verbal reminders have failed.

Exceptions include obligations where demand is unnecessary, such as when the law or contract dispenses with it (e.g., Article 1169, par. 2-3), but for loans, demand is generally required.

Key Elements of an Effective Demand Letter

A demand letter must be clear, concise, and professional to be legally sound. It should avoid inflammatory language to prevent counterclaims for harassment under Republic Act No. 10175 (Cybercrime Prevention Act) if sent electronically, or Article 26 of the Civil Code (right to privacy).

Essential Components

Header Information:
- Sender's full name, address, contact details.
- Date of the letter.
- Recipient's full name and address (use last known address to ensure delivery).
Salutation: Formal, e.g., "Dear Mr./Ms. [Borrower's Last Name],".
Body:
- Introduction and Reference to the Loan: State the purpose, reference the loan agreement (date, amount borrowed, terms, any promissory note or receipt).
- Statement of Facts: Detail the loan disbursement, due date, payments made (if any), and outstanding balance. Include calculations for principal, interest, and penalties.
- Demand for Payment: Specify the exact amount due, payment method (e.g., bank transfer, cash), and a reasonable deadline (typically 10-15 days).
- Consequences of Non-Compliance: Warn of legal action, such as filing a complaint with the barangay, small claims court, or regular court, plus recovery of attorney's fees (under Article 2208), costs, and damages.
- Invitation for Settlement: Offer to discuss amicable resolution to show good faith.
Closing:
- Polite but firm sign-off, e.g., "Sincerely," followed by the sender's signature and printed name.
- If represented by a lawyer, include the attorney's details.

Delivery Methods

Preferred: Registered mail with return receipt (via PhilPost) to prove delivery, as required for evidentiary purposes in court.
Alternatives: Personal delivery with acknowledgment receipt, email (with read receipt), or courier service. For electronic delivery, ensure compliance with Republic Act No. 8792 (Electronic Commerce Act) for validity.
Retain copies and proof of sending.

Step-by-Step Guide to Drafting the Demand Letter

Follow these steps to create a robust demand letter:

Gather Documentation: Collect the promissory note, receipts, bank statements, or any evidence of the loan. Calculate the total due, including:
- Principal amount.
- Interest: Stipulated rate or legal rate (6% p.a. post-demand).
- Penalties: As per agreement, but not exceeding reasonable amounts to avoid being void for being contrary to morals (Article 1306).
Determine Jurisdiction and Next Steps:
- For amounts up to PHP 1,000,000: Small Claims Court (expedited, no lawyer needed).
- Over PHP 1,000,000: Regular civil action in Municipal/Metropolitan Trial Court or Regional Trial Court, depending on amount.
- Mandatory Barangay Conciliation: Under Republic Act No. 7160 (Local Government Code), for disputes between residents of the same city/municipality, attempt settlement at the barangay level first (Katarungang Pambarangay).
Draft the Letter:
- Use formal language, avoid slang.
- Be factual and objective.
- Keep it to 1-2 pages.
Review and Edit: Check for accuracy, tone, and completeness. Have a third party review if possible.
Send and Follow Up: Monitor the deadline. If no response, proceed to barangay or court.

Sample Demand Letter Template

[Your Full Name]
[Your Address]
[City, Province, ZIP Code]
[Email Address]
[Contact Number]
[Date]

[Debtor's Full Name]
[Debtor's Address]
[City, Province, ZIP Code]

Subject: Demand for Payment of Unpaid Loan

Dear [Debtor's Full Name],

This letter serves as a formal demand for the payment of the outstanding loan you obtained from me on [date of loan], in the amount of PHP [principal amount], as evidenced by the promissory note dated [date] and attached hereto as Annex "A".

Under the terms of our agreement, the loan was due and payable on [due date], with [interest rate, if any] interest per annum. To date, you have failed to make any payments, resulting in an outstanding balance of PHP [total amount, including interest and penalties as of date]. A breakdown is as follows:

Principal: PHP [amount]
Accrued Interest: PHP [amount] (calculated at [rate] from [start date])
Penalties: PHP [amount] (as per agreement)

I hereby demand that you pay the full amount of PHP [total] within [number, e.g., 15] days from receipt of this letter. Payment may be made via [specify method, e.g., bank deposit to Account No. XXX at Bank YYY].

Should you fail to comply, I will be constrained to pursue legal remedies, including but not limited to filing a collection suit before the appropriate court, where I will seek recovery of the principal, interest, damages, attorney's fees, and litigation costs. This may also affect your credit standing.

I am open to discussing an amicable settlement. Please contact me at [your contact] within the specified period.

Sincerely,

[Your Signature]
[Your Printed Name]

Enclosures: [List, e.g., Promissory Note]

Common Mistakes and Best Practices

Mistakes to Avoid

Vague Language: Specify exact amounts and deadlines to avoid disputes.
Threatening Tone: This could violate anti-harassment laws (e.g., Article 285, Revised Penal Code on unjust vexation).
Omitting Proof: Always attach supporting documents.
Ignoring Barangay Step: Skipping this can lead to case dismissal.
Unreasonable Demands: Excessive interest may render the loan voidable.

Best Practices

Consult a Lawyer: While not mandatory for drafting, legal advice ensures compliance.
Keep Records: Document all communications.
Consider Alternatives: If the borrower is insolvent, explore compromise agreements under Article 2028.
For Secured Loans: Mention intent to foreclose collateral under Republic Act No. 3135 (Real Estate Mortgage Law) or Chattel Mortgage Law (Act No. 1508).
Multiple Borrowers: Address jointly and severally if applicable (Article 1207).
Corporate Borrowers: Verify authority of signatories under Corporation Code (Batas Pambansa Blg. 68).

Potential Outcomes and Escalation

If the borrower responds positively, negotiate a payment plan or deed of assignment. If ignored, proceed as follows:

Barangay Level: File for conciliation; if unsuccessful, obtain a Certificate to File Action.
Court Filing: Prepare a complaint with the demand letter as exhibit.
Enforcement: If judgment is obtained, execute via writ (e.g., garnishment under Rule 39, Rules of Court).

In cases of fraud (e.g., estafa under Article 315, Revised Penal Code), the demand letter can support criminal charges, but consult authorities.

Conclusion

Writing a demand letter for an unpaid loan in the Philippines is a critical tool for creditors to enforce rights efficiently and legally. By adhering to the Civil Code and related laws, and following the structured approach outlined, lenders can maximize recovery chances while minimizing risks. Remember, this process promotes fair debt collection, aligning with principles of justice and equity in Philippine jurisprudence. If complexities arise, seeking professional legal assistance is recommended to navigate specific circumstances.