Loan Dispute Between Relatives & Demand Letters in the Philippines

A comprehensive legal-practice guide

1. Why money disputes among relatives are different

Usual commercial loan	Family/relative loan
Negotiated at arm’s-length; written contract expected	Frequently verbal, informal, or documented only by a chat message or handwritten note
Parties are strangers; risk allocation clear	Guilt, delicadeza, and cultural expectations blur business/legal boundaries
Collection steps are purely legal	First resort is often a personal request, “hiya,” or barangay elder mediation

The informality means evidence, prescription periods, and mandatory conciliation become critical once the relationship sours.

2. Governing Law & Key Doctrines

Topic	Statutory / Case-law anchors	Practical take-away
Nature of the contract	Civil Code Arts. 1953–1961 (mutuum); Arts. 1933–1934 (commodatum)	A simple “pautang” is mutuum—ownership of the money passes to the borrower, who must return the same amount, not the same bills.
Form & proof	Arts. 1356, 1358; Fortunato v. CA	Writing is not required for validity, but written proof (promissory note, text thread, bank transfer slip) is crucial in court.
Burden of proof	Rule 130, Sec. 1 (Revised Rules on Evidence)	Plaintiff-creditor must prove: (1) loan was granted, (2) amount, (3) due date, (4) non-payment.
Legal interest	Nacar v. Gallery Frames (G.R. No. 189871, 2013)	6 % p.a. on loans or forbearance of money, from judicial or extrajudicial demand until full payment, unless a different, lawful rate was expressly agreed.
Prescription	Arts. 1144 (written: 10 yrs), 1145 (oral: 6 yrs); Art. 1155 (interruption)	A written loan prescribes in 10 years; an oral loan in 6. Demand letters or a written acknowledgment before expiration interrupt and reset the clock.
Default (mora)	Arts. 1169, 1170	Debtor is in default only after demand—judicial or extrajudicial (e.g., demand letter)—unless the instrument sets a date certain.
Attorney’s fees & damages	Arts. 2208, 2219–2229	Allowed when debtor’s act is in bad faith, forces creditor to litigate, or the contract so stipulates. Must be alleged and proved.

3. Demand Letter: Purpose & Anatomy

Purpose
- Shows good faith effort to settle; keeps family bridges intact.
- Legally:
  - Constitutes extrajudicial demand (triggers default and interest).
  - Interrupts prescription (Art. 1155).
  - Satisfies a prerequisite for attorney’s fees.
  - Often required for Barangay Katarungang Pambarangay proceedings.
Essential contents (suggested template)
1. Header & date
2. Relationship acknowledgment (“As your cousin, I…”) – optional but tactful
3. Statement of facts: when, how much, purpose of loan; attach proof.
4. Due date & present balance (principal + agreed/ legal interest)
5. Reference to prior reminders/acknowledgments
6. Clear demand: payment in full or installment, mode (cash, bank, GCash)
7. Deadline: reasonable—commonly 5-15 calendar days
8. Consequences: barangay mediation, small-claims, attorney’s fees, legal interest
9. Polite closure appealing to family harmony
10. Signature & contact details
Delivery
- Best: Personal service with signed “Received” copy.
- Alternatives: Registered mail (keep registry receipt & card), courier with tracking, e-mail/ Messenger screenshot plus affidavit of service.
- Keep proof—courts require it.

4. Escalation Roadmap

Step	Where filed / Who facilitates	Monetary ceiling (July 2025)	Notes
A. Barangay conciliation (Lupon/Punong Barangay)	Barangay where both parties reside	Any amount	Mandatory except if parties reside in different LGUs or relationship falls under exceptions (e.g., involving minors, family court matters). Must obtain a Certificate to File Action (CFA) if mediation fails.
B. Small Claims (AM 08-8-7-SC, as amended)	Metropolitan/ Municipal Trial Court	≤ ₱1 million (inclusive of interest & penalties)	No lawyers inside courtroom; judge decides same day. Attach demand letter, CFA (if needed), proof of loan. Filing fee relatively low; no appeal.
C. Regular civil action – Collection of Sum of Money	RTC/MTC depending on amount: > ₱1 M to RTC; ≤ ₱1 M to MTC	None	Full-blown litigation, pleadings, pre-trial, possible settlement, then trial. May claim damages & fees.
D. Alternative modes	Private mediation, family elder arbitration, church council	Any amount	Not mandatory but preserves relationships; agreements may be notarized and enforced as compromise judgments.

5. Typical Defenses Raised by the Debtor-Relative

Denial of the loan – “It was a gift.”
Payment already made – burden shifts to debtor once creditor proves the loan.
Partial payment/novation – new agreement replaced the loan.
Prescription – action filed beyond 6 / 10 years with no timely interruption.
Vitiated consent or incapacity – loan contracted under threat or by a minor.
Simulation / lack of cause – money intended as capital contribution, not loan.
Unconscionable interest – courts may reduce rates exceeding ceiling under the Usury Law (now suspended but still grounds for equity).

6. Evidence Checklist for the Creditor

Evidence	Weight
Signed promissory note or receipt	Best
Bank/GCash transfers labeled “loan”	Strong
SMS, Messenger, Viber admissions (“I’ll pay next week”)	Strong (print + phone screenshots + affidavit)
Witness testimony (other relatives present)	Moderate
Barangay minutes acknowledging debt	Moderate
Ledger or informal IOU without signature	Weak unless corroborated

7. Interest, Penalties & Usury Concerns

Contractual interest is enforceable if (a) expressed in writing and (b) reasonable.
Courts routinely void “5-6” (20 %-30 % monthly) rates as unconscionable.
If interest is void, loan remains valid but earns 6 % p.a. legal interest from demand.
Penalty clauses (e.g., ₱1 000/day) may be reduced under Art. 1229 if iniquitous.

8. Ethical & Practical Tips for Family Collections

Talk first, write later. A blunt demand letter without prior conversation can explode emotions.
Tone matters. Use respectful language; avoid threats beyond lawful recourse.
Offer realistic terms. Installments or debt restructuring often succeed where lawsuits fail.
Mind prescription. Even while being considerate, send a written acknowledgment request or minimal demand every few years to keep the claim alive.
Keep documentation contemporaneously. Memories fade; courts weigh written proof.
Separate attorney’s advice from family mediation. Sometimes a “third-party” barangay captain or church elder helps preserve ties.

9. Sample Demand Letter (abridged)

July 15, 2025

Dear [Name of Debtor-Relative],

I hope you and the family are well.

1. Loan details. On March 1, 2024, I lent you ₱300 000 to help with your medical expenses, with the understanding that you would repay the full amount by December 31, 2024.

2. Amount now due. Despite several reminders, the balance of ₱300 000, plus agreed interest of 6 % p.a. from January 1, 2025, remains unpaid. An updated computation is attached.

3. Demand. Please settle the total amount of ₱316 500 on or before July 30, 2025 by cash deposit to BPI Account # 1234-5678-90 or GCash [number].

If we cannot resolve this by the said date, the Katarungang Pambarangay law requires us to appear before our Barangay for mediation. Failing that, I will be constrained to file a Small Claims action, with corresponding costs and legal interest.

I trust we can clear this matter amicably. Thank you for your attention.

Respectfully,

[Signature] [Name, address, contact]

(Attach: loan proof, computation schedule, bank details)

10. Timeline-at-a-Glance

Day 0 – Friendly reminder (call/text).
Day 7-30 – Formal demand letter served.
Day 30-60 – File Barangay mediation; 15-day mediation + 15-day Pangkat if requested.
Within 60 days after CFA issuance – File Small Claims (₱1 M↓) or civil action (₱1 M↑).
Small Claims hearing – usually within 30 days of filing; decision same day.
Regular case – pre-trial within 60 days, trial in 90, decision target of 12 months (often longer).
Execution – writ of execution after judgment becomes final; garnish bank accounts, levy property.

11. Common Pitfalls & How to Avoid Them

Pitfall	Prevention
Letting the claim prescribe	Interrupt with a written demand or secure a written acknowledgment before the 6th/10th year.
No proof beyond words	Always keep at least a chat screenshot or bank slip; better, execute a simple promissory note.
Skipping barangay mediation	File at barangay first if required, or risk dismissal.
Filing regular action when small claims suffices	Small claims is cheaper, faster, and non-appealable; use it when within the cap.
Inflated interest/penalties	Stick to reasonable rates (≤ 3 % monthly is usually acceptable) to avoid judicial reduction.

12. Frequently-Asked Questions

Can I charge compound interest? Only if explicit in writing and not unconscionable; courts are reluctant to impose compound interest.
Does a notarized promissory note make the loan “secured”? Notarization only converts it into a public document (better evidentiary weight) but provides no security like a mortgage.
My sibling borrowed when she was abroad. Is barangay mediation still required? No; parties residing in different municipalities or abroad fall under the exception. You may proceed directly to court.
What if the debtor refuses to receive the demand letter? Send by registered mail; service is complete upon mailing. Keep registry receipts; execute an affidavit of service.
Can I waive the debt later without taxes? A gratuitous remission of debt is a donation and may trigger donor’s tax if the amount exceeds ₱250 000 exemption per year.

13. Final Thoughts & Professional Caution

Handling a loan dispute within the family walks a tightrope between vindicating one’s legal rights and preserving kinship. Begin with dialogue, escalate methodically, document everything, and keep timelines in view. When in doubt—especially on tax consequences, large sums, or cross-border elements—consult a Philippine lawyer for tailored advice.

This article is for informational purposes only and does not create an attorney-client relationship.