Introduction

In the Philippines, personal loans between individuals or from informal lenders are common, often based on trust and verbal agreements. However, when a borrower fails to repay, the lender may need to take formal steps to recover the debt. One of the most critical initial actions is sending a formal demand letter. This document serves as an official notice to the debtor, demanding payment and potentially laying the groundwork for legal action if ignored. Under Philippine law, particularly the Civil Code, a demand letter is often essential to establish the debtor's default, which is a prerequisite for enforcing obligations through the courts.

This article provides a comprehensive guide to sending a formal demand letter for unpaid personal loans in the Philippine context. It covers the legal basis, purpose, drafting guidelines, delivery methods, potential outcomes, and related considerations, drawing from relevant laws such as the New Civil Code (Republic Act No. 386), Rules of Court, and jurisprudence from the Supreme Court.

Legal Basis for Demand Letters in Personal Loan Disputes

The foundation for requiring a demand letter stems from the Philippine Civil Code, which governs obligations and contracts, including loans (referred to as "mutuum" under Article 1933). Key provisions include:

Article 1169: Obligations become due and demandable upon the fulfillment of any suspensive condition or the arrival of the term. However, for the debtor to be in default (mora solvendi), extrajudicial or judicial demand is generally required, unless the law or contract stipulates otherwise (e.g., in cases where time is of the essence or the obligation is reciprocal). In personal loans without a fixed repayment date, demand is crucial to trigger default and start the accrual of interest or penalties.
Article 1956: No interest shall be due unless stipulated in writing. A demand letter can reference any agreed-upon interest and demand its payment.
Article 2209: If the obligation consists of paying a sum of money, and the debtor incurs delay, the indemnity for damages shall be the payment of legal interest (currently 6% per annum under Bangko Sentral ng Pilipinas Circular No. 799, Series of 2013, unless a different rate is agreed upon).

Supreme Court rulings, such as in Solar Harvest, Inc. v. Davao Corrugated Cartons, Inc. (G.R. No. 176868, July 26, 2010), emphasize that demand is necessary to place the debtor in default, allowing the creditor to pursue remedies like rescission or damages. For personal loans, failure to send a demand may result in a court dismissing a collection case for prematurity.

Additionally, if the loan involves a promissory note or written agreement, the Notarial Law (Act No. 2711) may apply if the document was notarized, potentially strengthening the demand.

Purpose of a Formal Demand Letter

A demand letter serves multiple purposes in the context of unpaid personal loans:

Notification of Default: It formally notifies the borrower of their failure to repay, specifying the amount due, including principal, interest, and any penalties.
Opportunity to Settle Amicably: It gives the debtor a chance to pay without escalating to litigation, potentially preserving relationships.
Evidence for Court: If the matter proceeds to court, the demand letter acts as proof that the lender attempted extrajudicial resolution, which is required under Rule 16 of the Rules of Court (Motion to Dismiss for lack of cause of action if no demand was made) and aligns with the policy of alternative dispute resolution under Republic Act No. 9285.
Starting the Prescription Period: For civil obligations like loans, the prescriptive period is 10 years if in writing (Article 1144) or 6 years if oral (Article 1145). Sending a demand interrupts this period, restarting the clock.
Basis for Computing Damages: It fixes the date from which interest or penalties accrue due to delay.

In cases where the loan is secured by collateral (e.g., a chattel mortgage under Republic Act No. 1508), the demand may also initiate foreclosure proceedings.

When to Send a Demand Letter

Send a demand letter as soon as the loan becomes due and unpaid. For loans with a fixed maturity date, this is immediately after the deadline. For demandable loans (no fixed term), send it when repayment is reasonably expected based on the agreement.

Avoid undue delay, as prolonged inaction could imply waiver or lead to laches (unreasonable delay prejudicing the debtor). If the borrower has made partial payments or acknowledgments, reference these to show ongoing obligation.

Drafting a Formal Demand Letter

A demand letter should be clear, concise, professional, and factual to avoid defamation claims under Article 353 of the Revised Penal Code. It is advisable to have it drafted or reviewed by a lawyer, but individuals can prepare it themselves. Key elements include:

Structure and Content

Heading and Date:
- Your (lender's) name, address, and contact details.
- Date of the letter.
Recipient's Information:
- Borrower's full name and last known address.
Salutation:
- "Dear [Borrower's Name]," or "To Whom It May Concern" if necessary.
Body:
- Introduction: State your identity and relationship (e.g., "I am the lender in a personal loan agreement dated [date]").
- Facts of the Loan: Detail the loan amount, date disbursed, terms (interest rate, repayment schedule), and any supporting documents (e.g., promissory note, receipts). Attach copies if possible.
- Statement of Default: Explain how and when the borrower defaulted (e.g., "Despite the due date of [date], you have failed to repay the principal amount of PHP [amount] plus accrued interest.").
- Computation of Amount Due: Provide a breakdown:
  - Principal: PHP X
  - Interest: PHP Y (at Z% per annum from [date])
  - Penalties: PHP W (if stipulated)
  - Total: PHP Total
- Demand for Payment: Clearly demand full payment within a reasonable period (e.g., 10-30 days). Specify the mode (e.g., bank transfer, cash).
- Consequences of Non-Payment: Warn of potential legal action, such as filing a collection suit in the appropriate court (Municipal Trial Court for amounts up to PHP 400,000 in Metro Manila or PHP 300,000 elsewhere under A.M. No. 08-8-7-SC, or Regional Trial Court for higher amounts), or criminal action if applicable (e.g., estafa under Article 315 of the Revised Penal Code if deceit was involved in obtaining the loan).
- Reservation of Rights: State that you reserve all rights and remedies under the law.
Closing:
- "Sincerely," followed by your signature and printed name.
- Notarization (optional but recommended for evidentiary weight).

Sample Demand Letter Template

[Your Name]
[Your Address]
[City, Province, ZIP Code]
[Email and Phone]
[Date]

[Borrower's Name]
[Borrower's Address]
[City, Province, ZIP Code]

Dear [Borrower's Name],

I am writing to formally demand payment of the outstanding personal loan extended to you on [date of loan], in the amount of PHP [principal amount], pursuant to our agreement [reference any document].

The loan was due for repayment on [due date], with interest at [rate]% per annum. To date, you have failed to make the required payments, resulting in an outstanding balance of PHP [total amount], computed as follows:

Principal: PHP [amount]
Accrued Interest: PHP [amount] (from [start date] to [current date])
Penalties: PHP [amount] (if applicable)
Total Due: PHP [total]

I hereby demand that you pay the full amount within [number] days from receipt of this letter. Payment should be made via [method, e.g., bank deposit to Account No. XXX at Bank Y].

Failure to comply will compel me to pursue all available legal remedies, including but not limited to filing a civil action for collection of sum of money and damages before the appropriate court, and possibly criminal charges if warranted. This may also result in additional costs, such as attorney's fees and litigation expenses, which you will be liable for under Article 2208 of the Civil Code.

I hope for your immediate attention to this matter to avoid further action.

Sincerely,

[Your Signature]
[Your Printed Name]

Delivery Methods

To ensure proof of receipt:

Registered Mail with Return Receipt: Via PhilPost or private courier (e.g., LBC, JRS). This creates a record of delivery.
Personal Service: Hand-delivered with an acknowledgment receipt signed by the recipient.
Notarized Affidavit of Service: If delivered personally, have a witness.
Email or Electronic Means: Acceptable if the agreement allows it, but supplement with physical delivery for court purposes. Under the Electronic Commerce Act (Republic Act No. 8792), electronic notices can be valid if acknowledged.

Keep copies of the letter, proof of sending, and any response.

Potential Outcomes After Sending the Demand Letter

Payment: The borrower complies, resolving the issue. Obtain a receipt or release document.
Negotiation: The borrower may propose a payment plan. If agreed, formalize it in a compromise agreement (notarized for enforceability).
No Response or Refusal: Proceed to court. For small amounts, use the Small Claims Court (expedited, no lawyers needed for claims up to PHP 1,000,000 under A.M. No. 08-8-7-SC as amended). For larger sums, file a regular civil complaint.
- Venue: Court where the lender or borrower resides (Rule 4, Rules of Court).
- Filing Fees: Based on the amount claimed (e.g., 1% for docket fees).
- Evidence: Include the demand letter, loan documents, and proof of default.
Counterclaims or Defenses: The borrower might claim usury (interest over 12% per annum without BSP approval under the Usury Law, though liberalized), force majeure, or invalidity of the loan.
Criminal Aspects: If the loan was obtained through fraud (e.g., false representations), consider filing for estafa. However, mere non-payment of a loan is not criminal unless deceit is proven (People v. Mejia, G.R. No. 129577, August 31, 1998).
Enforcement if Judgment is Obtained: If the court rules in your favor, enforce via writ of execution, garnishment, or levy on properties.

Special Considerations

Interest and Penalties: Stipulated interest must be reasonable; excessive rates may be voided as unconscionable (Article 1306). Legal interest applies absent agreement.
Prescription: Act within the prescriptive period to avoid barring the claim.
Data Privacy: Under Republic Act No. 10173 (Data Privacy Act), avoid disclosing sensitive information unnecessarily.
COVID-19 and Moratoria: Past moratoriums under Bayanihan Acts may have affected due dates; check if applicable.
Informal Loans: Even without written agreements, oral loans are enforceable, but harder to prove (parol evidence rule under Article 1403).
Attorney Involvement: While not mandatory, consulting a lawyer ensures compliance and strengthens the case. Attorney's fees can be recovered if stipulated or if the debtor acted in bad faith (Article 2208).
Alternative Dispute Resolution: Before court, consider barangay conciliation for claims up to PHP 200,000 (Republic Act No. 7160, Local Government Code), which is mandatory for residents of the same city/municipality.

Conclusion

Sending a formal demand letter is a pivotal step in recovering unpaid personal loans in the Philippines, bridging amicable resolution and formal litigation. By adhering to legal requirements and best practices, lenders can protect their rights while minimizing risks. If the debt remains unpaid, escalating to judicial remedies ensures enforcement under the rule of law. Always document everything meticulously, as thorough preparation is key to success in any dispute.