In the Philippines, the purchase of a motor vehicle is often facilitated through financing agreements. To mitigate the risk of default, banks and financing companies frequently require a Co-maker (also known as a Co-borrower or Surety) to sign the loan agreement alongside the principal borrower.
While many view signing as a mere formality or a "favor" for a friend or relative, the Philippine legal system attaches heavy, often irreversible, financial obligations to this role.
1. The Nature of the Obligation: Solidary Liability
The defining characteristic of a co-maker’s liability in the Philippines is that it is solidary. Under Article 1207 of the Civil Code, a solidary obligation exists when the terms of the contract expressly state that each of the debtors is liable for the entire amount.
In almost all standard auto loan contracts, the co-maker signs as a "Solidary Co-debtor" or "Surety." This means:
- The creditor can demand payment of the entire debt from either the borrower or the co-maker.
- The creditor does not need to exhaust the properties of the principal borrower before going after the co-maker.
- The co-maker is equally responsible for the principal, interests, penalties, and legal fees.
Key takeaway: A co-maker is not a guarantor. A guarantor has the "benefit of excussion" (the right to demand the creditor exhaust the debtor’s assets first), whereas a co-maker/surety does not.
2. What Happens Upon Delinquency?
When an auto loan becomes delinquent (usually after 60 to 90 days of non-payment), the financing institution initiates recovery procedures. The co-maker is legally exposed in the following ways:
Demand for Payment
The bank will typically send demand letters to both the borrower and the co-maker. Legally, the bank is not required to wait for the borrower to fail to pay; they can technically approach the co-maker the moment the account falls into default.
Repossession and Deficiency Claims
If the vehicle is repossessed and sold at a public auction, the proceeds are applied to the outstanding balance. However, vehicles depreciate quickly, and the auction price rarely covers the full loan, especially after adding repossession expenses and storage fees.
- The Deficiency: The remaining balance after the sale is called the "deficiency."
- Liability: Both the borrower and the co-maker are solidarily liable for this deficiency. The bank can sue the co-maker to recover this amount even if the co-maker never used or possessed the vehicle.
Impact on Credit Score
Under the Credit Information System Act (R.A. No. 9510), banks report payment histories to the Credit Information Corporation (CIC). A delinquent auto loan will reflect poorly on the co-maker’s credit report, making it difficult for the co-maker to secure their own loans, credit cards, or mortgages in the future.
3. Defenses Available to the Co-maker
While the co-maker’s position is difficult, the law provide limited defenses:
- Extinction of the Principal Obligation: If the principal borrower pays the debt in full, or if the debt is condoned (forgiven) by the bank, the co-maker’s liability is extinguished.
- Material Alteration: If the bank and the borrower change the terms of the loan (e.g., increasing the interest rate or extending the term) without the co-maker’s consent, the co-maker may be released from liability under the principle of strictissimi juris.
- Payment by the Borrower: If the borrower makes partial payments, the co-maker’s liability is reduced by that same amount.
- Prescription: Under the Civil Code, actions based on a written contract must be brought within 10 years. If the bank waits longer than 10 years from the date of default to sue, the co-maker can raise the defense of prescription.
4. Right of Reimbursement
If a co-maker is forced to pay the bank, they are not without a remedy against the principal borrower. Under Article 1217 of the Civil Code, a solidary debtor who pays the entire obligation is entitled to reimbursement from their co-debtors for the share which corresponds to each.
If the co-maker pays the full amount, they step into the shoes of the bank (Subrogation). They can then legally sue the principal borrower to recover the total amount paid, plus interest from the date of payment. However, the practical challenge remains: if the borrower could not pay the bank, they may also lack the assets to reimburse the co-maker.
5. Summary Table: Borrower vs. Co-maker Liability
| Feature | Principal Borrower | Co-maker (Solidary) |
|---|---|---|
| Primary Responsibility | Yes | Yes |
| Can be sued alone? | Yes | Yes |
| Right to use vehicle? | Yes (Typically) | No (Usually) |
| Credit Score Impact? | Yes | Yes |
| Entitled to Reimbursement? | No | Yes (From the borrower) |
Conclusion
In the Philippine jurisdiction, being a co-maker is a high-risk commitment. The law treats the co-maker as if they were the borrower themselves. Before signing, an individual must recognize that they are not just "vouching" for someone's character; they are essentially buying a car's debt without necessarily owning the car.