Legal Actions for Collecting Unpaid Debts in the Philippines

I. Introduction

In the Philippines, the recovery of unpaid debts is governed primarily by the Civil Code, the Rules of Court, and special laws. Creditors have a range of remedies—from amicable demand to judicial foreclosure of security, execution of judgment, and, in appropriate cases, criminal prosecution. The choice of remedy depends on the nature of the obligation (purely civil or with criminal liability), the amount involved, the existence of security, and whether the debt is already due and demandable.

The guiding principle is Article 1156 of the Civil Code: an obligation is a juridical necessity to give, to do, or not to do. Non-performance gives rise to a right of action.

II. Prescription of Actions

Before initiating any action, verify that the claim has not prescribed:

• Obligations based on written contracts: 10 years (Art. 1144, Civil Code)
• Obligations based on oral contracts: 6 years (Art. 1145)
• Obligations arising from quasi-delicts: 4 years (Art. 1146)
• Collection of loans with promissory notes containing a due date: 10 years from the day they could be legally demanded (i.e., from maturity date)
• Credit card debts and open accounts: 10 years from last payment or last activity that acknowledges the debt
• Judgments: 10 years from finality, but action to revive judgment prescribes in another 10 years (Art. 1144(3))

Prescription is interrupted by (1) judicial demand, (2) extrajudicial written demand by the creditor, or (3) acknowledgment of the debt by the debtor (Art. 1155).

III. Extrajudicial Collection

1. Demand Letter (Final Demand to Pay)

   • Must state the exact amount, basis, interest (if stipulated), and a reasonable period (usually 7–15 days) to settle.
   • Should be sent via personal delivery with acknowledgment or registered mail with return card.
   • Essential to establish default in obligations “with a period” (Art. 1193) and to start legal interest running at 6% per annum (2024 BSP rate for legal interest on monetary obligations).

2. Notarization of the Debt (if unsecured)

   • Debtor may be invited to execute a new promissory note or acknowledgment with updated interest and attorney’s fees clause. This restarts prescription.

3. Debt Collection Agencies

   • Must be registered with the SEC and comply with the Data Privacy Act of 2012 (RA 10173) and the Financial Products and Services Consumer Protection Act (RA 11765).
   • Prohibited acts: harassment, threats, calls at unreasonable hours (before 6 a.m. or after 10 p.m.), disclosure to third parties without consent.

IV. Judicial Remedies

A. Small Claims Action (for debts ≤ PHP 1,000,000)

• Governed by A.M. No. 08-8-7-SC (as amended by OCA Circular No. 45-2024, effective April 1, 2024, raising the limit to PHP 1,000,000).
• Filed before the Metropolitan/Municipal Trial Courts.
• Purely monetary claims only (no foreclosure, specific performance).
• Procedure is summary: no formal pleadings except the Statement of Claim, no lawyers allowed (except for entities), decision within 24 hours after hearing, immediately executory.
• Ideal for simple loans, unpaid services, goods sold and delivered.

B. Summary Procedure (debts PHP 1,000,001 – PHP 2,000,000 outside Metro Manila; higher in Metro Manila)

• Revised Rules of Summary Procedure.
• Limited pleadings, 30-day decision after last responsive pleading or hearing.

C. Ordinary Civil Action for Collection of Sum of Money

Jurisdiction (as updated by RA 11576 – July 30, 2021):

• MeTC/MTC/MTCC/MCTC: up to PHP 2,000,000 (exclusive of interest, damages, attorney’s fees, costs)
• RTC: above PHP 2,000,000

Procedure:

1. File verified Complaint with Certification Against Forum Shopping.
2. Attach promissory note, contract, statements of account, demand letter, proof of service.
3. Pay filing fees based on amount claimed (including 25%–30% attorney’s fees if stipulated).
4. Summons and Answer (15–30 days).
5. Pre-trial, trial, judgment.
6. Remedies against adverse judgment: Motion for Reconsideration, Appeal (Rule 40/41 or 45).

D. Collection Cases with Real Estate Mortgage or Chattel Mortgage

File for Judicial Foreclosure (Rule 68, Rules of Court) in the RTC where the property is located, regardless of amount.
Alternative: Extra-judicial Foreclosure under Act No. 3135 (as amended by RA 11107) if there is a special power in the mortgage contract.

E. Petition for Involuntary Insolvency (if debtor has multiple creditors)

Under the Financial Rehabilitation and Insolvency Act (FRIA, RA 10142), but rarely used for simple debt collection.

V. Provisional Remedies Available to Creditors

1. Preliminary Attachment (Rule 57)

   • May be applied for at the commencement of the action or any time before entry of judgment.
   • Grounds: debtor is about to abscond, fraud in contracting the debt, or removal/concealment of property.

2. Replevin (Rule 60)

   • For recovery of personal property (e.g., leased equipment, car under chattel mortgage before foreclosure).

3. Support Pendente Lite (in appropriate cases).

VI. Execution of Judgment

• Motion for Execution within 5 years from finality (Rule 39).
• After 5 years but within 10 years: Action for Revival of Judgment.
• Modes: levy on real/personal property, garnishment of bank accounts/salaries (subject to exempt amounts under Labor Code and Family Code).

VII. Criminal Actions (when applicable)

1. Estafa (Art. 315, Revised Penal Code)

   • Swindling through deceit (misappropriation, false pretenses, post-dating checks with knowledge of insufficiency).
   • May be filed simultaneously with civil action; reservation no longer required (2023 rulings).

2. B.P. Blg. 22 (Bouncing Checks Law)

   • Prima facie evidence of knowledge of insufficiency if check dishonored and no payment within 5 banking days from notice.
   • Penalty: imprisonment or fine up to double the check amount.
   • Civil liability automatically included.

3. Other crimes: violation of Trust Receipts Law (P.D. 115), credit card fraud.

VIII. Special Rules for Certain Types of Debts

• Salary loans of government employees: governed by GSIS/SSS rules and RA 11494 (Bayanihan 2 grace period rules now expired).
• Agricultural debts: moratoriums occasionally declared by law.
• Microfinance and small loans: regulated by RA 10693 (Microfinance NGOs Act) and RA 9474.
• Credit card debts: BSP Circular 1098 (2020) on ceiling of interest and penalties.

IX. Practical Recommendations for Creditors

1. Always document the loan (promissory note with conformity of spouse if married and funds used for family benefit – Art. 94, Family Code).
2. Include stipulation for 12%–36% interest p.a. and 25% attorney’s fees.
3. Require post-dated checks or real/chattel mortgage.
4. Send demand letter through counsel immediately upon default.
5. For amounts ≤ PHP 1M, use small claims – fastest and cheapest.
6. Monitor prescription dates religiously.

The Philippine legal system provides robust mechanisms for debt recovery, but success depends heavily on proper documentation at the inception of the credit transaction and prompt action upon default. Delay is the creditor’s worst enemy.