A Practical Legal Guide

1. What is “foreclosure” and what are “arrears”?

Foreclosure is the legal process by which a lender (usually a bank, financing company, or government housing agency) enforces its mortgage over a property when the borrower defaults on the loan. The lender sells the property, usually through a public auction, to recover the unpaid debt.

Arrears are missed payments (installments, interest, penalties) that have become due but remain unpaid. Once arrears reach a certain level and the borrower violates the terms of the loan (for example, 3 consecutive missed monthly payments), the loan may be considered in default, and foreclosure can follow.

In the Philippines, foreclosure is most common for:

Real estate mortgages (house and lot, condo, land)
Chattel mortgages (cars, appliances, other movable property)
In-house financing and installment contracts with developers
Government housing loans (PAG-IBIG, SSS, GSIS, etc.)

Understanding your payment options while in arrears is critical, because some solutions are only available before the foreclosure auction, and some even earlier—before the lender starts any legal process at all.

2. Legal framework for foreclosure in the Philippines (overview)

Key laws and rules (simplified):

Civil Code of the Philippines – on obligations and contracts, mortgages, and payment.
Act No. 3135, as amended – governs extrajudicial foreclosure of real estate mortgages (the most common type for housing loans with banks).
Rules of Court, Rule on Foreclosure (Rule 68) – governs judicial foreclosure.
Chattel Mortgage Law – governs foreclosure of chattel mortgages (e.g., car loans).
Republic Act No. 6552 (Maceda Law) – gives special protections to buyers of real property on installment (mostly in-house developer financing, not regular bank mortgage loans).
Financial Rehabilitation and Insolvency Act (FRIA) – covers court-supervised rehabilitation and suspension of payments for debtors, including individuals in some cases.
Various BSP, DTI, and other regulations on consumer protection, debt collection, and disclosure.

The contract remains the primary reference: loan agreement, promissory note, mortgage contract, and any amendments or restructuring agreements. These typically contain:

When you are considered in default
The interest rate and penalties
The lender’s remedies, including foreclosure and acceleration (making the full balance due at once)
Provisions on attorney’s fees and costs in case of collection

3. Stages from arrears to foreclosure

It helps to see foreclosure as a timeline, because different payment options are realistic at different stages:

Early arrears stage
- 1–2 missed payments
- Reminder calls, SMS, emails
- Typically easiest time to negotiate simple arrangements.
Serious arrears / pre-default
- Several missed payments (e.g., 3 months or more, depending on lender)
- Formal demand letters may be sent
- Bank may invoke acceleration clause (full loan balance becomes due).
- Restructuring or payment plans are still very possible if you act quickly.
Pre-foreclosure
- Lender prepares for judicial or extrajudicial foreclosure
- Notices and postings begin (for extrajudicial).
- Options narrow but you can still often cure default, restructure, or redeem.
Foreclosure auction
- Property is sold at public auction.
- Either the lender or a third party may become the highest bidder.
Post-sale period
- For some types (especially extrajudicial foreclosure of real estate), the borrower has a statutory redemption period (often up to one year from registration of the certificate of sale, but details can vary).
- After that, title may be consolidated in the buyer and a writ of possession issued.

At each stage, there are different payment strategies available.

4. Payment and settlement options before foreclosure

This is where you have the most flexibility. Once you are in arrears but before any foreclosure sale, these are your usual options:

4.1. Paying arrears to “cure” the default (reinstatement)

Many lenders will allow you to cure the default by paying:

All unpaid installments (principal + interest),
Penalties and late payment charges,
Any agreed legal or collection fees, if they’ve already engaged counsel, and
Sometimes a lump sum or initial amount plus a signed catch-up plan.

This is sometimes called reinstating the loan. After reinstatement:

Your loan goes back to being current.
The original terms (interest rate, maturity date, etc.) usually remain.

Not all contracts explicitly grant a “right to reinstate,” but as a practical matter many lenders prefer reinstatement over foreclosure because:

Foreclosure is costly and time-consuming, and
Lenders generally don’t want to manage or own properties.

Tip: The earlier you approach the lender, the less you’ll have to pay in penalties and charges, and the more willing they are to help.

4.2. Loan restructuring

Loan restructuring means changing the terms of your existing loan to make it more manageable. This may include:

Extending the loan term (e.g., from 10 to 15 or 20 years)
Reducing the monthly amortization
Possibly revising the interest rate
Capitalizing unpaid interest or arrears into the principal (so you pay them over time instead of as a lump sum)
Adjusting due dates or grace periods

Restructuring is not a right by default; it’s a negotiated agreement. Lenders assess:

Your current income and capacity to pay
The value of the collateral
Your payment history

Government housing programs (like PAG-IBIG housing loans) have historically provided various restructuring programs and penalty condonation schemes at different times, especially for long-standing arrears. Banks and financing companies may have their own “loan relief” or “restructuring” programs.

Key points when restructuring:

Ask for a computation showing:
- New principal balance
- New interest rate
- New monthly amortization
- Total finance charges over the remaining term
Clarify whether penalties are waived, reduced, or capitalized.
Get the restructuring agreement in writing and keep copies.

4.3. Short-term payment plans and catch-up schedules

If your money problem is temporary (e.g., job change, business slowdown), some lenders may allow:

Temporary reduced payments for a few months
A catch-up plan: you pay your regular monthly plus an extra amount for arrears over a set period
Interest-only payments for a short period

These arrangements are usually informal compared to full restructuring, but you should still:

Ask for written confirmation of any special arrangement.
Make sure you clearly understand the deadline to fully catch up.

4.4. Refinancing with another lender

If your current lender is strict or your interest is high, you can try refinancing:

Another bank or financial institution pays off your existing loan.
You then owe the new lender with (hopefully) better interest rate or terms.

This is essentially taking a new loan to pay the old one. It can:

Avoid foreclosure if done early,
Lower monthly payments if interest is lower or term is longer.

However:

You may need a cleaner payment record and updated documents.
There may be fees, taxes, and charges for the new mortgage.

4.5. Dación en pago (dacion en pago) / voluntary surrender

Dación en pago is a Civil Code concept where the debtor transfers ownership of a property to the creditor as payment of the debt (in whole or sometimes in part). Some lenders call this:

“Voluntary surrender”
“Voluntary cession”
“Dacion in payment”

In practice:

You offer to transfer the property to the bank.
The bank evaluates the market value of the property versus your outstanding loan.
If accepted, you sign documents transferring the property; the bank treats the debt as fully or partially paid, depending on the agreement.

Borrowers like this if:

They can no longer afford the loan,
They want to avoid a foreclosure record and public auction,
They want to avoid or minimize deficiency (the balance still owed after sale).

Important details:

There is no automatic right to dacion; it must be accepted by the lender.
You should be clear whether the entire debt is cancelled, or if there will still be a deficiency.
Get the terms in writing, including any waiver of deficiency or penalties.

4.6. Selling the property and letting the buyer “assume” the loan

Another option is to sell the property yourself before foreclosure and:

Use the sale proceeds to fully pay the loan, or
Let the buyer “assume balance” (subject to lender’s approval).

Option 1 – Full payoff sale

If the selling price > total debt, you:
- Pay the lender in full,
- Keep the excess as your equity.

Option 2 – Assumption of loan

Buyer pays you your equity (if any),
Buyer applies to the lender to assume or substitute as the new borrower,
Lender evaluates the buyer as if they are a new loan applicant.

In either case:

Coordinate with the lender for updated payoff amounts and required documents.
Make sure all agreements are documented and notarized.

4.7. Special case: buyers protected by the Maceda Law

The Maceda Law (RA 6552) protects certain buyers of real estate on installment from developers or sellers, especially where:

The property is residential
The buyer is paying via installments (usually in-house or contract to sell; not a typical bank mortgage)
The buyer has paid at least 2 years of installments, in which case the law grants:
- Grace periods to pay unpaid installments, and
- In some cases, a cash surrender value (a portion of total payments refunded) if the contract is cancelled.

Maceda Law issues are not always about foreclosure (because many of these are not yet fully mortgaged to a bank), but about cancellation of contract. If your situation involves:

Contract to Sell or Rent-to-Own, and
You are dealing with a developer, not a bank,

then Maceda Law may give you:

Extra time to pay arrears,
Refund rights under certain conditions.

The exact protections depend on:

How long you’ve been paying,
What kind of contract you signed.

4.8. Government housing loans (PAG-IBIG, etc.)

Government home financing institutions often have special programs over time, such as:

Loan restructuring programs
Penalty condonation (partial or full waiver of penalties)
Special grace periods during calamities or crises

If your loan is from such an institution:

Check their current guidelines and circulars.
Ask specifically about restructuring, condonation, or relief programs.
They may have standard forms and procedures for delinquent borrowers.

5. Options once foreclosure is already filed or ongoing

Once the lender has initiated foreclosure, your options change—but they don’t necessarily disappear.

5.1. Judicial vs extrajudicial foreclosure (real estate)

Judicial foreclosure

Lender files a case in court to foreclose the mortgage.
Court issues a judgment, then orders the sale of the property.
Borrower generally has an “equity of redemption”—a chance to pay and stop the foreclosure before the sale is confirmed by the court.
Judicial foreclosure can be slower but is used in certain circumstances or when required by law or contract.

Extrajudicial foreclosure (Act No. 3135)

Very common for bank housing loans.
Mortgage contract typically contains a “special power of attorney” authorizing the lender (or sheriff/notary) to sell the property if the borrower defaults.
Requires posting and publication of notice of sale.
Auction conducted by a sheriff or notary public.

For extrajudicial foreclosure of real estate:

Borrower generally has a statutory right of redemption (often within one year from registration of the certificate of sale in the Registry of Deeds).
During this redemption period, you can still recover the property by paying the required amounts.

5.2. Paying to stop the foreclosure sale

Depending on the timing and the contract, you may:

Pay all arrears plus costs (reinstatement) and convince the lender to cancel the sale, or
Pay the entire outstanding obligation including interest, penalties, and foreclosure expenses to fully redeem the property.

In practice:

Some lenders are willing to halt or postpone the sale if they see a concrete, funded plan (e.g., you have a refinancing loan that’s about to be released).
Always deal directly with the foreclosure department or authorized officers and insist on written confirmation if a scheduled sale is cancelled or postponed.

5.3. Redemption after the auction sale

If the foreclosure sale pushes through and your property is auctioned:

If you have a right of redemption, you can still redeem the property by paying:
- The purchase price (winning bid),
- Plus interest and other allowable charges (like taxes and necessary expenses).

The period and exact amount required for redemption depend on:

The type of foreclosure (judicial vs extrajudicial),
The law and contract applicable,
Whether the property is under real estate mortgage or some other scheme.

Even after sale, some lenders may still entertain negotiated settlements or restructuring, especially if they ended up as the auction buyer and you show real capacity to pay.

6. After the redemption period: deficiency or surplus

If you do not redeem the property within the applicable period:

Ownership consolidates in the buyer (often the bank or a third party).
A new title is issued in the buyer’s name.
The buyer may seek a writ of possession to physically take over the property.

Financially:

If the auction price is less than your total obligation (including interest and costs), you may still owe a deficiency.
If the auction price is more than your total obligation, any surplus should be turned over to you (after settling legal costs and proper deductions).

Some borrowers mistakenly think foreclosure ends all liability. That is not always true—deficiency claims are common in bank foreclosures, unless the lender waives the deficiency or a law specifically prevents deficiency recovery in your situation.

7. Foreclosure of chattel mortgages (e.g., car loans) and arrears options

For car loans and other movable property under chattel mortgage:

The lender may repossess the vehicle if you default.
They typically sell it at public auction as required by law.
Before sale, you may try to:
- Normalize the account by paying arrears, or
- Negotiate a restructure or extension.

Issues to watch:

If the lender repossessed the car without respecting legal requirements or without giving proper notice of sale, there may be defenses, but these are case-specific and need legal advice.
After sale, if the proceeds don’t fully cover your loan, the lender may still sue for deficiency, depending on circumstances.

8. Negotiating with lenders: practical tips

Whether you’re in early arrears or already facing foreclosure, how you negotiate matters:

Communicate early and in writing.
- Don’t wait until the auction is scheduled.
- Send emails or letters politely explaining your situation and proposed solution.
Show evidence of capacity.
- Income documents, job offers, business records, or proof of funds.
- Lenders are more likely to agree if they see concrete proof you can comply.
Be specific in your proposal.
- “I can pay ₱___ on or before [date], and ₱___ monthly thereafter to fully settle arrears within six months.”
- Vague promises rarely work.
Ask about all options.
- Restructuring, interest reduction, penalty condonation, extension of term, or dacion.
Get everything documented.
- Always ask for written confirmation of any agreement or change in terms.
- Keep receipts and copies of all correspondence.
Stay professional.
- Emotional appeals can be understandable but should be paired with a realistic plan.

9. Protection against abusive collection and unfair practices

Even if you are in arrears, you still have rights as a consumer:

Lenders and collectors should not:
- Threaten violence or use abusive language,
- Publicly shame you,
- Harass third parties who are not co-borrowers,
- Misrepresent legal status (“We will imprison you tomorrow”) – loan default is generally civil, not criminal, unless there is fraud.

If you experience abusive collection, you may be able to complain to:

The lender’s internal complaints unit,
Relevant regulators (for example, for banks, the Bangko Sentral ng Pilipinas; for financing companies, the competent regulatory agency),
Or seek legal advice regarding possible civil or administrative actions.

10. When it may be worth seeking legal or professional help

Given the complexity and high stakes, consider consulting a lawyer or qualified adviser if:

A foreclosure sale is already scheduled or has recently taken place.
You believe legal requirements (like notices and publications) were not followed.
You are facing a possible deficiency judgment.
The property is a family home and you want to explore whether there are special protections.
You suspect unfair contract terms or hidden charges.
You are considering judicial remedies like an injunction, suspension of payments, or rehabilitation.

Bring to your lawyer:

Loan agreement and promissory notes
Real estate or chattel mortgage documents
All demand letters, notices of foreclosure, and publication copies (if any)
Payment receipts and restructuring agreements
Any written offers or communications with the lender

11. Key takeaways

Arrears are not yet the end. The earlier you act, the more options you have—especially reinstatement and simple repayment plans.
Restructuring and refinancing can make the loan sustainable, but they must be formally agreed with the lender.
Dacion en pago, voluntary surrender, or selling/assigning the property can help you exit the loan and avoid or limit deficiency.
Even after foreclosure is filed or auctioned, there may still be redemption and negotiation possibilities depending on the type of foreclosure and timing.
Deficiency claims can survive foreclosure, so always clarify whether any settlement fully extinguishes the debt.
Special laws like the Maceda Law and various government housing programs may give additional grace periods, restructuring options, or refunds in specific situations.
Throughout, you are still covered by consumer protection standards; abusive collection and unfair practices are not allowed.

This is a general overview based on Philippine law and common practices. The precise options in any one case depend heavily on your contracts, the type of loan, the stage of foreclosure, and the lender’s internal policies. For decisions involving significant property or large debts, it’s strongly advisable to get personalized legal advice tailored to your exact documents and situation.