Loan Disputes Between Relatives and the Role of a Demand Letter in the Philippines

This article is for general information only and is not a substitute for individualized legal advice. Philippine laws cited are current as of 7 July 2025.

1. Why loans between relatives become contentious

Informality. Family loans are often undocumented (oral agreements, text messages, or handwritten IOUs).
Deferred or “open-ended” repayment. Parties assume a flexible schedule until one side feels exploited.
Emotional stakes. Cultural expectations of pakikisama (harmonious relations) can collide with the legal principle that contracts have the force of law (Civil Code, Art. 1159).
Interest misunderstandings. One party may believe “no interest,” while the lender silently expects returns, creating conflict when interest is later asserted.

2. Legal Framework

Topic	Key Provisions	Practical Take-aways
Nature of the contract	Civil Code Arts. 1933-1953 (loan for consumption – mutuum), Arts. 1935-1937 (commodatum).	A mutuum transfers ownership of money to the borrower; repayment is in kind (same amount/quality), not the exact bills.
Form	No special form required, but interest must be in writing (Art. 1956).	If there is no written interest stipulation, courts will delete the interest and award only the principal.
Prescription (time-bar)	Art. 1144 (10 yrs – written); Art. 1145 (6 yrs – oral).	Clock starts when the loan “falls due.” An extrajudicial demand—typically a demand letter—interrupts and restarts the prescriptive period (Art. 1155).
Interest limits	Central Bank Circular 905 (1982) suspended the Usury Law ceilings, but courts strike down “unconscionable” rates (e.g., > 24% p.a.).	Reasonable interest is usually 6–12 % p.a. unless special circumstances.
Barangay conciliation	Local Government Code (“Katarungang Pambarangay,” RA 7160) §§ 399-422.	For parties living in the same city/municipality, a loan dispute must first go to the Barangay Justice System (Lupon) unless: • amount > PHP 400 000 (latest DOJ/SC threshold) • parties opt for court mediation via Small Claims • other statutory exceptions (e.g., one party is a corporation).
Small Claims	A.M. 08-8-7-SC, as amended by A.M. 11-11-6-SC & A.M. 19-06-02-SC (effectivity 2022; jurisdiction now ≤ PHP 1 000 000).	Fast-track, lawyer-free procedure filed at MeTC/MTC within plaintiff’s residence or defendant’s. Filing fee is low; template forms available in court.
Civil vs. Criminal	Non-payment alone is civil. It becomes criminal only if accompanied by fraud (e.g., bouncing checks ⇒ B.P. 22; estafa under Art. 315 RPC).	Courts are cautious to avoid “criminalizing” pure debt.

3. The Demand Letter: Purpose and Structure

3.1 Why send one?

Legal prerequisite
- Interrupts prescription (Art. 1155).
- Often demanded by courts as proof of prior “last clear chance” before suit.
Documentary evidence Shows that the lender asserted the debt and gives the borrower a specific due date.
Settlement signal Many relatives pay or propose a compromise after receiving a formal notice.

3.2 Timing

Scenario	When to send
No maturity date agreed	After a reasonable period has elapsed; the Civil Code treats the loan as payable “on demand.”
Fixed maturity	Immediately after due date or grace period.
Stalled verbal promises	As soon as borrower begins avoiding informal follow-ups.

3.3 Essential contents

1. Heading & return address
2. Identification of parties
3. Recital of facts
   • Date & amount of loan
   • Mode of release (cash/bank)
   • Interest stipulation (if any)
4. Statement of breach
5. Demand
   • Exact amount due (principal + interest + penalties, if written)
   • Clear deadline (commonly 5–15 calendar days)
6. Consequences of non-payment
   • Barangay filing
   • Small Claims / civil action
   • Reservation of rights & costs
7. Closing & signature
8. Proof of delivery instructions
   • Registered mail (retain registry receipt & affidavit)
   • Personal service with signed acknowledgment

(Attach copies of IOU, bank slips, messages, etc.)

3.4 Tone and language

While it must be firm, avoid defamatory statements (“swindler,” “thief”). Publication or group-chat shaming risks civil and even criminal liability (libel, unjust vexation).

4. Evidence-Building Checklist

Evidence	How to secure	Why it matters
Written loan document / chat screenshots	Print, have them notarized as “true copies.”	Establish existence and terms of the loan.
Proof of disbursement	Bank slips, e-wallet logs, receipts.	Shows consideration flowed to borrower.
Demand letter + proof of receipt	Registry receipt, courier log, or Barangay notice.	Supports interruption of prescription and “good faith.”
Witness affidavit (optional)	Family friend present during loan.	Useful when agreement was purely oral.

5. Paths After the Demand Letter

Full payment or compromise
- Draft a Quitclaim & Release to extinguish the obligation.
Barangay mediation
- File a Request for Mediation (Form available at Lupong Tagapamayapa).
- Possible outcomes: Amicable Settlement (convertible to court judgment), Arbitration by Punong Barangay, or Certification to File Action if talks fail.
Small Claims
- File “Statement of Claim” (Form 1-SC).
- Attach demand letter, proof of service, loan documents.
- Single-hearing rule; decision in 24 hours; judgment immediately executory.
Ordinary civil action (Regional Trial Court / MTC)
- Needed if claim > PHP 1 M or complex counterclaims.
- Through counsel; follows Rules of Civil Procedure.
Criminal complaint (rare)
- Only if elements of estafa or B.P. 22 present.
- Requires separate demand letter tailored to criminal statute (e.g., 5-day grace under B.P. 22).
Enforcement of judgment
- Writ of Execution: sheriff may garnish wages, levy properties, or seize bank accounts.
- Post-judgment interest (6% p.a. legal rate) accrues until satisfaction.

6. Common Pitfalls (and How to Avoid Them)

Pitfall	Avoidance Tip
Relying on oral promises	Always put the principal terms—and interest—in writing.
Unconscionable interest	Cap rates at commercially reasonable levels (6–12 % p.a.).
Letting prescription lapse	Send a demand letter before the 10-year (written) or 6-year (oral) mark, and keep proof.
Skipping Barangay process	If required, suits filed directly in court will be dismissed for failure to exhaust remedies.
Public humiliation tactics	Could backfire as cyber-libel; use private, documented channels.

7. Sample Demand Letter (Template)

Date: 15 July 2025 To: Mr. Juan D. Reyes
Blk 123, Brgy. Mabuhay, Quezon City

Re: Final Demand for Payment of PHP 300,000 Loan

Dear Mr. Reyes:

On 10 April 2023 you borrowed Three Hundred Thousand Pesos (₱300,000) from me, payable on or before 10 October 2023, with interest at 6 % per annum as evidenced by the attached signed Promissory Note.

Despite repeated verbal reminders, the loan remains unpaid. As of today, the outstanding balance is ₱318,000 (breakdown below).

FORMAL DEMAND. Please remit full payment within ten (10) calendar days from receipt of this letter, or on or before 25 July 2025, by cash deposit to BPI Account ×××-1234-5678.

Failure to pay will compel me to: a. Initiate Barangay conciliation under RA 7160; and/or b. File a Small Claims case pursuant to A.M. 08-8-7-SC, with a request for costs, attorney’s fees, and applicable interest.

This letter constitutes an extrajudicial demand under Article 1155 of the Civil Code, interrupting prescription.

Thank you for your immediate attention.

Respectfully,

[signature] Maria L. Cruz

Enclosures: (1) Promissory Note 04-10-2023; (2) BPI Deposit Slip 10-Apr-2023; (3) Interest Computation Sheet

CC: Punong Barangay, Brgy. Mabuhay (for reference only)

8. Frequently Asked Questions

Is notarization mandatory? No. A loan contract is valid even if unnotarized; notarization merely converts it into a public document, making it admissible without further proof.
Can I charge penalties for late payment? Yes, if explicitly stipulated in writing. Otherwise, the court may award only the legal interest rate (currently 6 % p.a.).
What if my relative lives abroad? Jurisdiction depends on where the debtor can be served; you may sue in the Philippines if there are attachable assets here, or sue abroad under that country’s rules.
Will suing ruin family ties? Possibly. Many parties opt for compromise agreements at the Barangay level to preserve relationships. Mediation centers of the Integrated Bar of the Philippines (IBP) offer neutral venues.
Can text messages substitute for a demand letter? Courts increasingly accept digital evidence, but a formal written demand remains best practice, especially to interrupt prescription and to satisfy court or small claims rules.

9. Practical Checklist for Lenders

Draft or update a simple Loan Agreement (principal, interest, maturity).
Keep proof of fund transfer.
Calendar the due date and a reminder one month before.
Send a formal demand letter via registered mail.
Prepare Barangay request forms in case payment is not made.
Compile documentary evidence for possible Small Claims filing.

10. Conclusion

A loan dispute between relatives in the Philippines straddles both legal formalities and family dynamics. The demand letter is a modest but powerful document: it preserves rights, interrupts prescription, nudges the borrower toward settlement, and lays the groundwork for Barangay conciliation or court action. Observing the correct sequence—from proper documentation, timely demand, Barangay proceedings, to Small Claims—minimizes cost, delay, and emotional fallout while maximizing the chance of recovery.

Prepared by: ———