Responding to Demand Letters for Unpaid Consumer Loans in the Philippines

This article explains what a demand letter is, why it matters legally, the rights and risks for borrowers, and practical, step-by-step actions to take—from first receipt through settlement or litigation. It is written for Philippine consumers with bank, credit-card, fintech, and lending-app debts.

1) What a “demand letter” is (and why it matters)

A demand letter is a written notice from a creditor (or its law firm/collection agent) asserting that you owe money and asking you to pay, usually within a set period. In Philippine law, it’s more than a warning:

It can place you in legal delay (default) or mora solvendi, which can trigger liability for interest and damages (Civil Code Art. 1169), unless demand is legally unnecessary (e.g., the due date is already certain and missed).
It can interrupt prescription when it is a written, extrajudicial demand (Civil Code Art. 1155). That means the clock for the creditor to sue can restart when a proper written demand is sent or when you acknowledge the debt in writing.
It frames evidence. It creates a paper trail of the claim, amount, dates, and terms that may show up in court later.

2) Key laws and regulators that shape collection of consumer debts

Civil Code – rules on obligations (default, damages, interest; Arts. 1169, 1170, 2209–2212, 1229, 1249, 1253, 1270–1271, 1155, 1144–1145).
Truth in Lending Act (RA 3765) and BSP/SEC disclosure rules – require clear disclosure of finance charges.
Financial Products and Services Consumer Protection Act (RA 11765) – prohibits abusive collection and empowers the BSP, SEC, and Insurance Commission to police unfair practices and order restitution/penalties.
Lending Company Regulation Act (RA 9474) and Financing Company Act (RA 8556) – licensing and conduct of lending/financing companies; SEC issuances prohibit harassment and “debt shaming.”
Data Privacy Act (RA 10173) – protects personal data; unlawful disclosure of contacts/“debt shaming” may be actionable with the NPC.
E-Commerce Act (RA 8792) – e-signatures and electronic documents can be valid and admissible.
No imprisonment for debt (1987 Constitution, Art. III, Sec. 20). Criminal cases may still arise for B.P. Blg. 22 (bouncing checks) or estafa when deceit is present—different from mere non-payment.

3) Your core rights when you’re being collected from

To be free from harassment, threats, and public shaming. Repeated calls at odd hours, contacting your employer or contact list, posting/sharing your debt on social media, or profane/violent threats can be unlawful (regulator rules, RPC on threats/coercion/libel, DPA).
To clear, itemized information on principal, interest, penalties, fees, and the basis (contract/terms).
To privacy and data minimization. Collectors should only use your data for lawful, disclosed purposes and with appropriate safeguards.
To dispute inaccurate amounts and request supporting documents (contract, statement of account, payment ledger, assignment/authority of the collector).
To negotiate for restructuring, installment plans, condonation of penalties, or discounted settlements (“lump-sum”).
To counsel and representation. You may have a lawyer speak for you; collectors must respect this.

4) First 48-hour checklist (practical actions)

Read the letter carefully. Note who sent it, the claimed amount, reference numbers, and payment deadline.
Verify authority. If it’s a law firm or collection agency, ask for proof of engagement/assignment (or a Special Power of Attorney) and an updated statement of account.
Keep everything. Save envelopes, screenshots, emails, and call logs; photograph caller IDs and texts.
Acknowledge receipt without admitting liability. If you need documents, reply in writing: “I received your letter. Please provide the following to validate your claim…” (see §14 for a template).
Stop any harassment. Send a written cease-and-desist for abusive conduct and request that all communications be in writing or at reasonable hours at a specified number/email.
Check prescription. Written loan contracts generally prescribe in 10 years (Art. 1144). Oral or quasi-contract claims are 6 years (Art. 1145). Each written demand or written acknowledgment can interrupt prescription (Art. 1155).
Audit the computation. Many letters overstate interest or penalties; see §7–8.
Avoid rash promises or postdated checks you cannot honor. A returned check can create B.P. 22 exposure.

5) What a proper demand letter should contain

Identification of the creditor, account/contract, and collector’s authority (engagement letter/SPA).
Amount due broken down by principal, interest, penalty, and fees, plus the periods and rates applied.
Legal/contractual basis (loan agreement/card terms; statements).
A reasonable cure period and how to pay (channels, reference numbers).
Contact details and data-processing notice (why they hold your data; how to complain).

If any of this is missing, ask for it in writing and suspend payment until validated.

6) Validating the debt: documents to request

Executed loan/credit-card application and terms, and any amendments.
Statements of account and ledger showing how the balance was computed since origination or default.
Interest and penalty tables, with dates and compounding basis.
Proof of assignment/authority if a third party is collecting.
Payment history/receipts and reversals/charge-backs, if any.

7) Interest, penalties, and what courts do with “unconscionable” rates

The Usury Law ceilings are suspended, but courts still strike down or reduce unconscionable rates and penalty charges on grounds of public policy/equity. Interest must be in writing to be enforceable.
Courts may:
- Reduce penalty clauses if iniquitous or unconscionable (Civil Code Art. 1229).
- Apply 6% per annum legal interest for forbearance of money (post-2013 jurisprudence) where appropriate.
- Disallow interest-on-interest unless clearly stipulated.
Practice tip: Ask for a recomputation using (i) contractual rates supported by documents; (ii) no double-counting of penalty and default interest; (iii) legal interest only where the contract fails.

8) Common red flags in demand computations

Stacking a “penalty” and a “default interest” on the same base for the same period.
Compounding without contractual authority (or compounding more frequently than allowed).
Continuing to charge add-ons (insurance, service/maintenance fees) after default without basis.
Incorrect start dates for default interest (e.g., before actual due date or grace period ends).
Collecting attorney’s fees without a contractual clause (or claiming “25% attorney’s fees” by default).
Charging VAT on interest/penalty (generally not VATable; banks pay percentage taxes, not your liability).

9) Harassment, unfair collection, and “debt shaming”

Prohibited conduct typically includes: violent or criminal threats; obscene language; repeated calls at odd hours; contacting your employer or relatives; public disclosure of your debt (group chats, social posts, mass texts); using fake “court” notices or criminal summons; and misrepresenting as police or government officials.

What to do: keep evidence; send a written cease-and-desist; escalate to the BSP (for banks/e-money/credit cards), SEC (for lending/financing companies and lending apps), or NPC (for privacy violations). You may also explore civil and criminal complaints (grave threats/coercion, libel/slander, unjust vexation).

10) Data privacy and your contacts

Your contact list, photos, or messages are personal data. Broadcasting your debt or scraping your phonebook without proper basis/consent may violate the Data Privacy Act and its IRR.
You can demand data-subject rights: access, correction, deletion, restriction, and to complain with the NPC.

11) Negotiation playbook (what usually works)

Open with validation. “Please validate the claim and send a detailed computation and authority.” This buys time and improves your leverage.
Propose realistic terms based on net cash flow: (a) installment plan; (b) discounted lump-sum (often more flexible for charged-off accounts).
Ask to waive penalties/fees, and reduce default interest in exchange for certain, prompt payment.
Insist on written settlement terms (or a notarized Quitclaim/Release) and official receipts. Include:
- Exact amount and deadline
- Full satisfaction of the account and no resale of any residual.
- Deletion/closure coding for credit reporting (if applicable).
- Data minimization post-settlement (archiving/deletion schedule).
Never pay to personal accounts. Use official bank or corporate channels only.

12) If the loan is secured

Chattel-mortgage loans (e.g., vehicle) may proceed via replevin (court order to seize) and/or foreclosure under the Chattel Mortgage Law, after proper notice and sale. You remain liable for any deficiency unless otherwise agreed.
Real-estate mortgages may be foreclosed judicially or extrajudicially (Act No. 3135). Extrajudicial foreclosure involves notice, publication, auction, and a redemption period; failure to observe formalities can be a defense.
Credit cards/personal loans are typically unsecured—no repossession—but the creditor can sue to collect.

13) Litigation pathways and timelines

Small Claims: Money claims up to ₱1,000,000 (exclusive of interest/attorney’s fees/costs) may be filed as small claims in the first-level courts. Lawyers generally cannot appear, proceedings are expedited, and judgments are final. Expect a verified Statement of Claim, summons, and a set hearing date. Defendants must file a verified Response with evidence by the deadline stated (often at least a day before the hearing). Bring originals and IDs.
Ordinary civil action for sum of money: For amounts beyond the threshold or with complex issues. This can take longer and involves full pleadings and trial.
Collection with replevin/foreclosure: For secured loans, as discussed above.

Prescription recap:

Written contract: 10 years
Oral/quasi-contract: 6 years
Judgments: 10 years (to enforce)

14) Sample response templates

A. Validation + Stand-still (no admission)

Subject: Response to Your Demand Dated [date]; Account No. [####] I acknowledge receipt of your letter. Please provide the following to validate the claim and allow me to reconcile my records: (1) executed loan/credit-card agreement and terms; (2) complete statement of account and ledger with dates, rates, and basis of computation; (3) proof of your authority/engagement; and (4) updated payoff figure as of [date], broken down by principal, interest, penalties, and fees. Pending validation, kindly hold further collection action and communicate in writing to this email/address. Thank you.

B. Cease-and-Desist for Harassment

We have logged multiple calls/texts at unreasonable hours and messages to third parties about my account. Such acts are unlawful. Effective immediately, cease all harassing communications and any disclosure to my employer, relatives, or contacts. Limit communications to written email/letters during business hours. Non-compliance will be escalated to the proper regulators and authorities.

C. Settlement Proposal (Discounted Lump-Sum)

Without admitting liability for the disputed charges, I can liquidate the account by paying ₱[offer] on or before [date], on the following conditions: (1) full and final settlement of Account No. [####]; (2) waiver of all penalties and remaining interest/fees; (3) issuance of official receipt and a notarized Release of Claim; and (4) confirmation that no residual balance will be sold or collected. Please send a countersigned agreement with payment instructions.

15) Strategy if you receive court papers (not just a demand)

Check the document: Is it a Summons from a court (with case number and judge/branch), or just a scare letter? Real court papers will show a docket number and require you to respond.
Calendar the deadline immediately and prepare a verified Response/Answer with attachments. In small claims, missing the deadline can lead straight to judgment.
Gather defenses and documents: payment receipts, proof of harassment/data violations, miscomputations, absence of authority/assignment, lack of contract, unlawful interest/penalties, prescription, or improper venue/service.
Consider settlement alongside defense: Courts encourage amicable settlement; come with a realistic offer if appropriate.

16) Common defenses and pressure points

Prescription (see §3, §13).
Lack of standing or no proof of assignment to the collector.
Defective service of summons or wrong venue.
Unconscionable interest/penalties; seek judicial reduction and recomputation.
Payment or partial payment not reflected.
Violation of regulator rules and Data Privacy Act (grounds for counterclaims or separate complaints).
Absence of written stipulation on interest/fees/attorney’s fees.

17) Negotiated resolutions that stick

Prefer written, countersigned agreements (email is okay if clearly attributable; notarization is better).
Ensure the agreement includes: (i) final payoff, (ii) dates and mode of payment, (iii) release and quitclaim, (iv) treatment of negative reporting and data retention, and (v) consequences of default that are proportionate and lawful.
Keep proof of payment forever (digital + paper). Ask for a closure letter.

18) What not to do

Do not ignore a Summons or Statement of Claim.
Do not issue postdated checks you can’t fund.
Do not admit liability or commit to amounts you haven’t validated.
Do not pay through personal e-wallets or bank accounts of agents.
Do not engage in heated calls—insist on written communication.

19) FAQs

Q: Can a demand letter alone garnish my salary or seize property? A: No. Garnishment/levy requires a court judgment and writ—except for contractual repossession of specific collateral under lawful procedures.

Q: Will my barangay handle this? A: The Katarungang Pambarangay Law generally excludes disputes where a party is a juridical person (banks, finance/lending companies). Many consumer-loan disputes bypass barangay conciliation.

Q: Can they jail me for non-payment? A: No imprisonment for debt. Criminal cases arise only in specific scenarios (e.g., B.P. 22 for bouncing checks, or estafa for fraud), which are distinct from mere non-payment.

Q: How high can interest go? A: While ceilings are suspended, unconscionable rates and penalties can be reduced by courts; unsupported fees can be disallowed.

20) Quick document kit (use/adapt as needed)

Debt Validation Request (see §14-A).
Harassment Cease-and-Desist (see §14-B).
Settlement Proposal (see §14-C).
Request for Authority/Assignment and SOA (if third-party collector).
Payment Plan Worksheet (monthly budget, priorities, realistic offer).
Evidence Log (dates/times of calls, texts, social posts, witnesses, screenshots).

Final thoughts

A demand letter is not a judgment—but it is a legal trigger you should handle deliberately. Validate the claim, assert your rights, correct unlawful charges, and either negotiate a sustainable settlement or prepare a focused defense. If in doubt, consult counsel; targeted advice early often saves far more than it costs.