I. Basic Principle: Debt Is a Civil, Not a Criminal, Obligation

General rule: Non-payment of a purely civil debt is not a crime in the Philippines. The Constitution expressly states that no person shall be imprisoned for debt.

What creditors are usually entitled to is to collect, not to jail the debtor, unless the case falls under specific criminal laws involving fraud or bad checks (discussed later).

II. When Is a Debtor in “Default”?

Under the Civil Code, an obligation to pay money becomes due and demandable according to the terms of the contract (e.g., loan due on a certain date, payable on demand, etc.).

A debtor is usually in legal default (mora debitoris) when:

The obligation is already due; and
There is a demand by the creditor (judicial or extrajudicial),
And the debtor still fails to pay.

Demand is not necessary in some cases (e.g., when the contract expressly waives demand, or when time is of the essence and the debtor refuses to pay on the due date), but as a practical matter, creditors usually issue written demand letters before filing suit.

Effects of default generally include:

Liability for interest, if agreed or allowed by law;
Liability for damages caused by the delay;
Possible acceleration of all remaining installments, if stipulated.

III. Extrajudicial (Out-of-Court) Remedies

Before going to court, creditors typically try non-judicial methods:

1. Demand Letters and Negotiation

Formal demand letters (often from law firms or in-house legal) stating:
- Amount of debt and basis (contract, loan, credit card agreement, etc.);
- Due date and current arrears;
- Interest, penalties, and other charges;
- A final deadline to pay or face legal action.
Parties may negotiate:
- Restructuring or extending maturities;
- Reduced interest or penalties;
- Lump-sum settlement for a discounted amount (dacion en pago or compromise).

2. Collection Agencies

Creditors (especially banks and lending institutions) often refer accounts to collection agencies, which then contact the debtor via calls, texts, emails, or letters.

While there isn’t a single comprehensive “fair debt collection” statute like in some other countries, harassment and abusive practices can:

Trigger complaints to regulators (e.g., Bangko Sentral ng Pilipinas for banks, DTI for some lending platforms);
Potentially violate laws on unjust vexation, grave threats, grave coercion, or data privacy (if they disclose your debt to others without valid basis).

Debtors can document harassment (recordings, screenshots, logs of calls) if they intend to complain.

IV. Civil Actions to Collect Debts

When negotiation fails, the creditor’s main legal remedy is a civil action for sum of money.

1. Types of Civil Cases for Debt

Ordinary collection case (sum of money)
- Based on a loan, promissory note, credit card agreement, open account, etc.
- Filed as a personal action – the relief sought is payment of money.
Small Claims Case
- A simplified, faster procedure for money claims not exceeding a certain amount (the jurisdictional threshold is set by Supreme Court rules and has been increased over time; you must check the current amount).
- Features:
  - No lawyers appearing for the parties (though they may be consulted behind the scenes);
  - Use of fill-in-the-blank forms;
  - Typically no formal trial and decisions are final and unappealable (with limited exceptions).
Civil Claim Attached to a Criminal Case
- If there is a related criminal case (e.g., estafa, BP 22), the creditor can claim damages within the criminal case, or reserve the right to sue separately.

2. Where and How to File

Venue (where to file):

For personal actions (like collection of sum of money):
- Filed in the place where plaintiff resides or defendant resides, at the option of the plaintiff.
Jurisdiction by amount (which court, MTC vs RTC) is determined by laws setting monetary thresholds, which have changed over time. Exact figures must be checked in up-to-date sources or with counsel.

Basic steps in an ordinary collection suit:

Filing of the Complaint
- Contains:
  - Parties (creditor/plaintiff, debtor/defendant);
  - Allegations (existence of obligation, default, amount due);
  - Attached documents (loan contracts, promissory notes, ledgers, demand letters).
Issuance and Service of Summons
- The defendant must be properly served summons for the court to acquire jurisdiction over his/her person.
Answer / Responsive Pleading
- Defendant may:
  - Deny liability;
  - Allege payment or partial payment;
  - Question interest rates as unconscionable;
  - Raise prescription, lack of cause of action, lack of capacity of plaintiff, etc.
Pre-Trial and Possible Settlement
- Court facilitates amicable settlement or narrowing of issues; sometimes mediation is ordered.
Trial
- Presentation of evidence by both sides (documents, witnesses).
Judgment
- Court may:
  - Order debtor to pay principal + interest + penalties + damages + attorney’s fees (if warranted);
  - Reduce excessive or unconscionable interest;
  - Dismiss the complaint (e.g., failure to prove the debt).
Appeal
- Either party may appeal within the allowed period, except in some small claims where judgments are immediately final.

V. Enforcement of Judgment: Execution, Levy, Garnishment

Winning a case is one thing; collecting is another.

1. Writ of Execution

If the debtor does not voluntarily pay after a final judgment, the court issues a writ of execution directing the sheriff to satisfy the judgment from the debtor’s properties.

2. Levy on Personal and Real Property

The sheriff may:

Levy personal property:
- Vehicles, equipment, valuables, and other movable property; then sell them at public auction.
Levy real property:
- Land, buildings, or other immovables; annotate the levy on the title (if titled), then sell at auction.

There are exempt properties that cannot be levied, such as:

Necessary clothing;
Tools for trade;
Certain portions of wages;
The family home, under conditions set by law (subject to some exceptions, e.g., mortgage on the family home itself).

3. Garnishment

Garnishment is the procedure where the court orders a third party who owes money to the debtor to instead pay the creditor. Examples:

Employer paying part of the debtor’s salary (subject to legal limits and exemptions);
Banks holding the debtor’s deposit accounts;
Other debtors of the debtor.

The garnishee must comply with the writ or face liability for contempt and possible liability as if they were the debtor up to the amount they owe.

4. Judgment Lien and Subsequent Actions

A recorded judgment may create a lien on real property, affecting the debtor’s ability to sell or mortgage it.

Creditors may also:

Negotiate post-judgment settlements or payment plans;
File supplemental complaints if interest continues to accrue and new defaults occur (depending on the nature of the contract).

VI. Secured Debts: Foreclosure of Mortgages and Chattel Mortgages

Some debts are secured by collateral. The creditor has additional remedies beyond a simple collection case.

1. Real Estate Mortgages (REM)

A real estate mortgage secures a loan with land or buildings. If the debtor defaults, the creditor may:

Judicial Foreclosure
- File a case in court seeking foreclosure of the mortgage.
- Court renders judgment ordering the debtor to pay within a period; otherwise, the property is sold at auction.
- The debtor’s equity of redemption allows payment before the sale.
Extrajudicial Foreclosure (under Act No. 3135 and related rules)
- Allowed if the mortgage contract contains a special power of attorney authorizing the mortgagee to sell the property in case of default.
- Involves:
  - Filing with the sheriff or a notary public;
  - Publication and posting of notices of sale;
  - Public auction.
- The mortgagor (or certain successors) often enjoys a statutory right of redemption within a specific period after the sale (commonly one year from registration of the sale, subject to specific rules and exceptions).

If the sale proceeds are insufficient, the creditor may sue for the deficiency (unless prohibited by law or special rules, as with some special housing/consumer laws).

2. Chattel Mortgages

A chattel mortgage secures obligations with movable property (e.g., vehicles, appliances, equipment).

Upon default, the mortgagee may:
- Take possession of the property, if provided in the contract;
- Cause its sale through foreclosure proceedings.
Special criminal risk: under the Revised Penal Code, disposing of or removing mortgaged property without the mortgagee’s consent, under certain circumstances, can amount to a criminal offense (e.g., “removal, sale or pledge of mortgaged property”).

VII. Criminal Cases Related to Non-Payment of Debt

Again: mere inability to pay is not a crime. However, there are situations where the law punishes the manner in which the debt arose or was handled.

1. Estafa (Swindling) – Revised Penal Code

Estafa often involves:

Deceit (false pretense or fraudulent act) at the time of contracting the obligation; or
Abuse of confidence, such as misappropriating money received in trust.

Examples (simplified):

Borrowing money under false pretenses (e.g., claiming you own certain properties or business when you don’t, with intent to defraud);
Receiving money to buy something or to hold it “in trust,” then misappropriating or diverting it and refusing to return it.

Key points:

The prosecution must prove deceit or abuse of confidence, not just non-payment;
Many disputes are mischaracterized as estafa when in reality they are purely civil.

2. Bouncing Checks Law – Batas Pambansa Blg. 22 (BP 22)

BP 22 punishes the making, drawing, and issuing of a check that is dishonored for insufficient funds, or because it was drawn against a closed account, when:

The issuer knew at the time of issue that there were insufficient funds or credit; and
The issuer fails to pay the amount or make arrangements within the statutory grace period after receiving notice of dishonor.

Important notes:

The law targets the act of issuing a worthless check, not the mere failure to pay;
Penalties include fine and/or imprisonment, though courts often impose fine only in many cases;
The debtor may still be civilly liable for the amount of the check (either in the criminal case or in a separate civil action).

3. Other Possible Offenses

Depending on the circumstances, the following might arise:

Falsification of documents (if fake documents were used to obtain loans);
Grave threats or coercion (by creditors, if they use illegal means to collect);
Usurious or abusive lending practices, which may be subject to administrative sanctions even though the Usury Law ceiling is no longer in force.

VIII. Insolvency, Rehabilitation, and Liquidation

When a debtor genuinely cannot pay debts as they fall due, there are frameworks under the Financial Rehabilitation and Insolvency Act (FRIA) and related rules.

1. Corporate Debtors

May file for court-supervised rehabilitation (or pre-negotiated or out-of-court restructuring).
The court may issue a stay order suspending collection suits, foreclosures, and other actions against the debtor during rehabilitation.
Creditors participate in the rehabilitation plan; claims may be restructured, reduced, or rescheduled.

2. Individual Debtors

FRIA also recognizes insolvency and rehabilitation for individual debtors under certain conditions.
In liquidation:
- Assets are gathered, sold, and distributed among creditors according to priority rules (secured creditors, preferred credits, ordinary credits, etc.).
- Some debts may become practically uncollectible if the debtor is adjudged insolvent and has no assets.

IX. Prescription (Statute of Limitations) for Debt Actions

Debt claims do not last forever. Actions to collect can prescribe (expire).

Under the Civil Code:

Actions upon a written contract (e.g., loan, promissory note) generally prescribe in 10 years from the time the right of action accrues (usually when the debtor defaults).
Actions upon an oral contract or quasi-contract (like unjust enrichment) generally prescribe in 6 years.

Prescription may be interrupted by:

Filing of a court case;
Written extrajudicial demand by the creditor;
Written acknowledgment of the debt by the debtor.

Because prescription rules can be nuanced (especially with installment loans, demand loans, credit card debts), it is wise to get specific legal advice for borderline or old debts.

X. Guarantors, Sureties, and Co-Makers

Debt doesn’t always fall on one person. There may be co-debtors, guarantors, or sureties.

1. Guarantor

A guarantor promises to pay if the principal debtor cannot, but generally has the right to insist that the creditor exhaust the debtor’s properties first (benefit of excussion), unless waived or the obligation is solidary.

2. Surety or Solidary Co-Debtor

A surety or solidary co-debtor is as directly liable as the principal debtor. The creditor may proceed directly against the surety/co-debtor without first going after the principal.
After paying, the surety/co-debtor may seek reimbursement from the principal debtor.

3. Rights After Payment

A guarantor or surety who pays:

Is subrogated to the rights of the creditor;
Can go after the debtor for reimbursement, plus interest and expenses, as allowed by law.

XI. Barangay Conciliation and Alternative Dispute Resolution

For many smaller disputes (especially between individuals in the same locality), the Katarungang Pambarangay system applies.

1. Barangay Conciliation

For certain disputes between persons residing in the same city or municipality, parties must first go through conciliation before the Barangay Lupon before filing a case in court.
Non-compliance can be a ground to dismiss the case.
There are exceptions (e.g., when one party is a government entity, or a corporation, or when the amount is above certain thresholds, or for cases with urgent legal remedies).

2. Mediation and Arbitration

Even after filing in court, judges may refer cases to court-annexed mediation;
Parties may also agree to arbitration in some commercial contracts, which can replace or precede court cases.

XII. Rights and Defenses of Debtors

Debtors are not helpless. They have legal protections and possible defenses.

1. Substantive Defenses

No valid contract (lack of consent, lack of cause, illegal object);
Altered or forged documents;
Payment already made (full or partial);
Prescription of the action;
Unconscionable interest, penalties, or charges;
Invalid acceleration clause or unfair contract terms.

Courts may strike down excessive interest rates and charges even when the debtor signed the contract, based on equity and jurisprudence.

2. Procedural Defenses

Lack of jurisdiction (wrong court, defective service of summons);
Plaintiff’s lack of legal capacity or authority to sue;
Non-compliance with barangay conciliation where required.

3. Protection Against Harassment

Debtors can:

Complain against abusive collection methods (excessive calls, threats, public shaming, contacting employer or neighbors without lawful basis);
Document and preserve evidence of such harassment;
Seek assistance from regulatory agencies, the barangay, or counsel.

XIII. Practical Takeaways for Creditors and Debtors

For Creditors

Document everything: written contracts, receipts, ledgers, demands.
Avoid harassment or unlawful collection tactics; focus on legal remedies.
Consider small claims or barangay conciliation when appropriate to save time and cost.
For large or secured loans, carefully assess whether foreclosure, rehabilitation, or ordinary collection suits are best.

For Debtors

Do not ignore demand letters and summons; ignoring can lead to default judgments.
Keep records of payments, bank transfers, and communications.
If genuinely unable to pay, negotiate for restructuring or settlement early.
Be cautious about issuing post-dated checks if you are unsure you can fund them (risk of BP 22).
Consult a Philippine lawyer promptly if:
- You are sued or receive summons;
- You are threatened with criminal cases like estafa or BP 22;
- There is a large secured debt at risk of foreclosure.

XIV. Final Reminder

This is a general overview of legal actions for non-payment of debt in the Philippines. Specific outcomes depend on:

The exact wording of contracts and documents;
The facts of each case;
Updated laws, court rules, and recent Supreme Court decisions.

For concrete decisions about an actual debt problem—whether you’re a creditor or debtor—it’s important to consult a Philippine lawyer or accredited legal aid service, who can review your documents and situation in detail.