Rights of a Co-Maker When the Borrower Defaults (Philippine Law)

(Prepared for general informational purposes only; always consult a lawyer for specific advice.)

1. Key Terms and Legal Sources

Term	Meaning under Philippine law	Principal sources
Co-maker (also “solidary maker” or, in banking practice, “accommodation party”)	A person who signs the same loan document or promissory note with the borrower, expressly undertaking primary, solidary liability.	Civil Code arts. 1207–1222 (solidary obligations); Negotiable Instruments Law (NIL) §§ 60–65, 29; Bangko Sentral ng Pilipinas (BSP) Manual of Regulations for Banks.
Guarantor	A secondary obligor liable only after exhaustion of the debtor’s assets.	Civil Code arts. 2047–2084.
Surety	A solidary obligor who is nonetheless entitled to the rights of guarantors when paying.	Civil Code art. 2047 (2nd par.).

Practical takeaway: In most consumer and SME bank loans, the “co-maker” is drafted as a solidary debtor or surety, not a mere guarantor. Always read the signature block: if it says “joint and several liability” the creditor may sue the co-maker immediately once the loan is due.

2. When the Borrower Defaults: What Happens First?

Maturity or acceleration. Default (mora) arises when the principal debtor fails to pay on the maturity date or when the creditor validly accelerates the debt under a default clause (Civil Code art. 1169).
Creditor’s election. Because liability is solidary, the lender may proceed directly against the co-maker for the entire unpaid balance, plus stipulated interest, penalties, and attorney’s fees (arts. 1207 & 1216).
Notice is customary, not mandatory. Philippine jurisprudence treats the lender’s demand letter as a condition precedent mainly for recovering attorney’s fees. It is not a statutory prerequisite to suing the co-maker—unless the contract makes it so.

3. Rights of the Co-Maker Against the Creditor

Right	Statutory / doctrinal basis	Scope and limits
To set up all defenses available to the borrower	Art. 1222 (those “derived from the nature of the obligation”) & NIL § 58	Includes illegality, lack of consideration, material alteration, prescription, fraud. Excludes purely personal defenses of the borrower (e.g., minority, insanity) unless they are also personal to the co-maker.
*To demand contribution* from other solidary debtors**	Art. 1217	Available only after the co-maker pays more than his share.
To be released by novation, condonation, or impairment of collateral	Arts. 1291, 1293 & NIL § 120	A release must be express or clearly implied; impairment of security without the co-maker’s consent may discharge him pro tanto.
To consent to extensions	Art. 2079 (by analogy to surety); BSP circulars on restructurings	Extension granted without the surety/co-maker’s consent may extinguish liability.
To oppose unlawful or unconscionable interest/penalties	Civil Code arts. 1229, 1306; Usury law as modified by BSP setting	Courts may reduce iniquitous interest or penalty rates—even if the co-maker signed the instrument.

4. Rights After the Co-Maker Pays

Right	Statutory basis	Explanation
Reimbursement (indemnification) from the borrower	Art. 1217; Art. 1291	The co-maker who pays becomes a creditor of the borrower for the full amount paid plus legal interest and expenses.
Legal subrogation to the lender’s rights and securities	Arts. 1302 (1) & 1304	Automatically steps into the lender’s shoes as to collateral (mortgages, pledges), guaranties, and priorities—without need of a separate assignment.
Contribution from fellow co-makers or sureties	Art. 1217 (last par.)	If several co-makers exist and one pays more than his proportionate share, he may sue the others for the excess.
Retention of instruments & cancellation of mortgage annotations	NIL § 188 (delivery of paid note); Property Registration Decree § 71	The note must be returned marked “Cancelled,” and mortgage liens may be discharged upon proof of payment.
Right to collect within the 10-year prescriptive period	Civil Code art. 1144	The action for reimbursement prescribes in 10 years from each payment date.

5. Special Defenses and Doctrinal Nuances

Accommodation Party under the NIL. A co-maker who receives no value for signing is an accommodation party (§ 29). Defenses lost: He cannot plead want of consideration against a holder in due course. Defenses retained: Forgery, material alteration, illegality rendering the instrument void.
Material Alteration (NIL §§ 124-125). Any unauthorized change (e.g., interest hike, blank-space filling beyond authority) avoids liability of parties who did not consent, including a co-maker.
Impairment of Collateral (Art. 2080; jurisprudence). If the creditor impairs pledged or mortgaged property without the co-maker’s assent—e.g., negligence leading to spoliation—the co-maker is released to the extent of the value impaired.
Extinguishment by Confusion/Merger (Art. 1275). Should the co-maker acquire ownership of the credit (e.g., by assignment) and remain debtor, obligations merge and are extinguished pro tanto.

6. Procedural Rights When Sued

Stage	Co-maker’s procedural options
Pre-litigation	Reply formally to demand; seek restructure or dacion en pago; negotiate waiver of penalties.
Complaint	Move to dismiss if venue, jurisdiction, or conditions precedent (contractual demand) are defective.
Answer	Plead affirmative defenses and compulsory counterclaims (e.g., usury, impairment of collateral).
Cross-claims	File cross-claims vs. co-defendant co-makers or third-party complaints vs. borrower.
Judgment execution	May request that borrower’s property be levied first (art. 1214) if obligation is only joint, not solidary. In most co-maker clauses this remedy is unavailable.
Appeal & suspension	Post supersedeas/appellate bond to stay execution; explore amicable settlement under the ADR Act.

7. Illustrative Supreme Court Rulings

Case	G.R. No. / Date	Key holding
Spouses Kho v. Court of Appeals	115508, Feb. 21 1997	A surety agreeing to solidary liability may be sued without need of prior demand upon the borrower.
Development Bank of the Phils. v. Arcilla	L-24593, Apr. 27 1972	An accommodation maker who paid becomes subrogated to the bank’s mortgage; foreclosure proceeds belong to him.
Rural Bank of Davao City v. CA	131889, May 24 1999	Impairment of collateral (bank allowed mortgaged cattle to die) partially released the sureties.
Filinvest Credit Corp. v. CA	52746, Oct. 25 1982	Guarantors enjoy the beneficio de excusión; sureties/co-makers do not, absent a contrary stipulation.

8. Risk-Management Checklist for Prospective Co-Makers

Read the signature block – look for “solidary,” “joint and several,” or “surety.”
Insert protective clauses – require creditor to exhaust borrower’s assets first, or limit your liability to a peso cap.
Monitor the loan – demand periodic statements from the borrower and creditor.
Secure counter-security – take a mortgage, post-dated checks, or chattel mortgage from the borrower in your favor.
Insist on notice of default – write it into the loan agreement that lack of notice = waiver of penalties against you.
Keep evidence of payments – official receipts stating you paid “for and in behalf of the borrower” to preserve reimbursement rights.

9. Conclusion

Under Philippine law a co-maker’s position is high-risk but not helpless. Once the borrower defaults, the creditor may sue the co-maker immediately, yet the latter wields potent statutory rights:

to raise many of the borrower’s defenses,
to be reimbursed and subrogated upon payment,
to seek contribution from fellow co-makers, and
to be discharged when the creditor impairs the security or alters the obligation without consent.

Understanding—and where possible negotiating—these rights before signing can spell the difference between a calculated favor and financial ruin.