LEGAL STEPS TO RECOVER AN UNPAID PERSONAL LOAN IN THE PHILIPPINES
(A practitioner-oriented guide as of 7 May 2025)
1. Framing the Claim
| Key question | Practical takeaway |
|---|---|
| Is there a written loan instrument? | A written contract, promissory note, or even text/e-mail thread is actionable for ten (10) years from default (Civil Code Art. 1144). |
| How much is owed (exclusive of interest, penalties and costs)? | Up to ₱400,000 is handled by the Small Claims Procedure; beyond that, file an ordinary civil action in the proper court. |
| Was the loan secured? | A real-estate or chattel mortgage lets you foreclose/replevy in parallel with, or instead of, a suit for collection. |
| Where is the debtor located? | Venue determines whether you must pass first through barangay conciliation (Katarungang Pambarangay Law, R.A. 7160). |
2. Extrajudicial (Pre-Court) Measures
Friendly Reminder & Dialogue
Good-faith negotiation preserves relationships and may lead to restructuring, dación en pago (asset transfer in lieu of cash), or voluntary settlement.Formal Demand Letter
- Contents: amount due (principal + agreed interest), computation to date, clear deadline (usually 10–15 days), and explicit notice that legal action follows default.
- Service: deliver personally and by registered mail or courier; keep proofs of receipt.
Barangay (Lupon) Conciliation – mandatory for parties who reside in the same city/municipality and amount is ≤ ₱1 million. Failure to appear or to request exemption bars the filing of suit.
Mediation/Arbitration under R.A. 9285
- You or the debtor may propose submission to a CAM (Court-Annexed Mediation) center or to a private mediator/arbitrator.
- A mediated settlement is enforceable as a compromise judgment once approved by the court.
3. Choosing and Commencing Your Court Action
| Remedy | When appropriate | Where & how to file | Typical timeline¹ |
|---|---|---|---|
| Small Claims (A.M. 08-8-7-SC, as amended 2022) | Purely money claims not exceeding ₱400k (principal only). No attorney’s fees recoverable except costs and contractual interest. | File verified Statement of Claim (Form 1-SCC) with supporting documents; pay docket (~₱2k). | Summons within 5 days, single-day hearing ≈30 days from filing, decision immediately after. |
| Ordinary Civil Action for Sum of Money | Claims above ₱400k, or where you want attorneys’ fees or complex relief. | Complaint under Rule 2, Rules of Court; venue: where plaintiff or defendant resides, or where cause arose. | 1–3 years to judgment, depending on congestion. |
| Foreclosure of Real-Estate Mortgage (REM) | Loan is secured by REM with annotated mortgage. | Extrajudicial: Notarial notice of sale via sheriff; Judicial: ordinary action under Rule 68. | Extrajudicial sale ≈3–6 months; debtor has 1-year equity of redemption. |
| Replevin (Rule 60) | Chattel-mortgaged personal property; repossession needed. | Bond = property’s value; sheriff seizes item pending suit. | Writ in days; full case proceeds in parallel. |
| Criminal complaints | B.P. 22 (bouncing check) or Estafa (Art. 315 RPC) if deceit present. | File with Office of the City/Provincial Prosecutor. | Prosecutorial resolution ≈3–6 months; trial 1-2 years. |
¹Indicative only; actual duration varies by docket load, pandemic backlog, and party conduct.
4. Provisional and Ancillary Remedies
Ask for these at any stage after filing—sometimes even before summons:
- Preliminary Attachment (Rule 57) – freeze debtor assets upon showing of fraud or intent to abscond.
- Garnishment – after judgment or with attachment bond, intercept salaries, bank deposits, receivables.
- Examination of Judgment Debtor (Rule 39 §36) – compel disclosure of assets.
- Contempt – enforce compliance with court orders.
5. Interest, Charges, and the Usury Question
- The Usury Law is not repealed but its interest-rate ceilings have been suspended since CB Circular 905 (1982); courts, however, strike down rates that are “unconscionable” (generally > 24% p.a. absent special circumstances).
- Contractual penalty charges beyond ₱₁₀,₀₀₀ require stipulation; otherwise legal interest of 6% p.a. applies from demand until full satisfaction (Nacar v. Gallery Frames, G.R. 189871, 13 Aug 2013).
6. Defenses Debtors Commonly Raise—and How to Meet Them
| Debtor defense | Creditor counter-measure |
|---|---|
| No written loan / forged signature | Present corroborative texts/e-mails, bank proofs; request handwriting comparison or expert testimony. |
| Allegedly paid | Demand official receipts; subpoena bank debits; invoke burden of proof on debtor for the fact of payment. |
| Unconscionable interest | Offer to reduce rate to prevailing 6–12% while insisting on full principal. |
| Prescriptive bar | Show acknowledgment of debt or partial payment within 10 years (Civil Code Art. 1155). |
| Lack of jurisdiction | Amend claim to correct amount or court; focus on principal claim in Small Claims. |
7. Judgment & Execution
- Finality – Decision becomes final after 15 days if unappealed (or 10 days in Small Claims, which is unappealable).
- Writ of Execution – Clerk issues; sheriff serves within 30 days.
- Satisfaction:
- Garnishment of salaries (up to 25% of disposable income under the Labor Code).
- Levy and auction of personal or real property (Rule 39 § 15-19).
- Third-party claim by other lien holders must be bonded to proceed.
8. Data Privacy & Collection-Agency Rules
- Collect only the personal data truly necessary for the claim; ensure disclosures comply with the Data Privacy Act of 2012 and NPC Advisory 20-01 (debt collection guidelines).
- If you engage a collection agency, verify it is SEC-registered and follows the Fair Debt Collection Practices regulations (SEC Memorandum Circular 18-2019).
9. Tax & Documentary Compliance
| Requirement | Why it matters | Remedy if overlooked |
|---|---|---|
| Documentary Stamp Tax (DST) on the original loan instrument | Unstamped docs are still admissible after paying DST plus surcharge (NIRC § 201). | Pay DST before presentation in evidence to avoid exclusion. |
| Notarization | Converts the loan to a public document, self-authenticating in court. | If not notarized, simply authenticate through testimony or handwriting expert. |
10. Flow-Chart Summary
- Verify claim & compute →
- Send demand letter →
- Barangay conciliation (if applicable) →
- Choose forum (Small Claims ▸ Ordinary Action ▸ Foreclosure ▸ Replevin) →
- File case + ask for provisional remedies →
- Attend mediation/JDR →
- Trial & decision →
- Execute judgment (garnishment, levy, foreclosure) →
- Collect balance or issue satisfaction of judgment.
11. Practical Drafting Tips
- Attach a Payment Schedule to the demand letter—courts favour transparency.
- Compute interest only up to date of filing; thereafter, the legal rate applies unless expressly stipulated.
- Keep originals of the IOU; courts require production for inspection.
12. Frequently Asked Questions
| Q | A |
|---|---|
| Can I charge collection service fees to the debtor? | Only if expressly stipulated; otherwise each party bears its own litigation expenses except recoverable costs. |
| May I post the debtor’s name on social media? | Risk of civil/ criminal liability for libel and DPA breach; stick to lawful channels. |
| Is personal appearance of parties required in Small Claims? | Yes; representatives need a Special Power of Attorney. |
| What if the debtor moves abroad? | Consider service of summons via e-mail or courier under A.M. 19-10-20-SC; enforce abroad through reciprocal treaties or collect against local assets. |
13. Key Statutes & Rules Cited (non-exhaustive)
- Civil Code Art. 1155, 1144, 1306, 1956-1961
- Rules of Court (Rule 2, 39, 57, 60, 68; A.M. 08-8-7-SC Small Claims; A.M. 19-10-20-SC service)
- Local Government Code (R.A. 7160, Katarungang Pambarangay)
- ADR Act (R.A. 9285) & Supreme Court A.M. 11-1-6-SC
- B.P. 22 (Bouncing Checks) & RPC Art. 315 (Estafa)
- Data Privacy Act (R.A. 10173) & NPC circulars
- SEC MC 18-2019 (Collection Agencies)
- Tax Code (NIRC) § 173-201 (DST)
Bottom Line
Recovering an unpaid personal loan in the Philippines is a layered process: start with a meticulously crafted demand, observe compulsory conciliation, and choose the simplest, quickest forum (often Small Claims). Bolster your action with provisional remedies, mind interest and privacy rules, and—once judgment is secured—use writs of execution and garnishment to actually collect. Preparing each step with documentary proof and clear computation is the surest way to turn paper rights into real money.