Risk is everywhere-the risk of default is present in credit.

There are loans

that remains hard to collect. This module presents the recovery effort that
maybe used by the organization to realize its goals of collecting the loans
while minimizing the cost. This shows the problems that maybe
experienced and gives alternative solution to problem account. Further,
some relevant laws to credit and collection are provided in this module.

TOPICS

Recovery of Credit Granted

 Relevant Laws in
Credit and Collection
MODULE 7
RECOVERY OF CREDIT
GRANTED
RELEVANT LAWS IN CREDIT AND COLLECTION

Learning Objectives
1. Identify the factors affecting the different remedies in case of non-
payment
2. Understand and differentiate the different classification of credit
3. Explain the different factors affecting recovery efforts
4. Determine different recovery friendly efforts
5. Elaborate on the different relevant laws in credit and collection like New
Bouncing Checks Law and Usury Law

REMEDIES IN CASE OF NON-PAYMENT FACTORS:

1. The loan or credit transaction has been consumed.

2. There was complete transfer of possession and ownership (by delivery)
*questions on goods in transit shall not be covered here
3. The seller has discharged with his obligation to deliver a determinate thing but the buyer
refuses to, or cannot pay.
4. There are no product defects or violations of warranties on the part of the seller.

CLASSIFICATION OF CREDIT
1. Simple loan (Mutuum)
 a. Loans on fungible and consumable things
b. Cash loans
2. Durables: appliances
3. Movables: vehicles
4. Immovable:
a. Real estate
b. Credit securities by immovable
Factors for Determining Recovery Efforts

1. Nature of the object of the credit (cash or merchandise);

2. If loan is secured or not;
3. If secured, nature of the property used as security (personal, movable,
immovable, incorporeal rights):
4. Nature of the documents used (mortgage, pledge, trust receipt);
5. Nature of the relationship between the buyer and seller;
6. Nature of the seller’s business;
7. Special circumstances attending the sale or credit transaction.

Debtor’s Motivation to Pay

1. In a Real Estate Mortgage

The Market Value of the property mortgage is substantially more than the
 balance of the loan.

To Illustrate:

Real Estate Property:

Php1,000,000.00

Mortgage value (50% of MV); Php500,000.00 Interest:

24% annual (Php120,000.00)

Php620,000 < Php1,000,000

The difference is vast. Motivation to pay is high.

BUT: (After 3 years - no payment on part of the debtor) Loan

Balance: Php860,000.00
Php860,000 vs. Php1,000,000

Difference diminishes therefore the motivation to pay acts accordingly.

2. Merchandise (Wholesaler and Retailer)

a. Profitable relationship;
b. Higher credit limit
c. Protection of credit standing for trade references

3. End-users or consumers
a. Movable Items: Very low which is why it is sold by withholding ownership.
b. Consumables (edible and potable): unpredictable which is why most
establishments are cash-basis

Friendly Recovery Efforts

1. Term extension – adding days to the due date of the account

2. Merchandise Return or Swap – if most of the merchandise have remained unsold; if the
merchandise cannot be sold in the debtor’s locality; if goods can still be sold somewhere
else.
3. Condonation of penalties and surcharges
Condonation: forgiving of debt
4. Restructuring
a. Simple – terms are extended and terms are reduced to affordable levels
b. Document substitution – e.g. from accounts receivable (sales invoice) to notes
receivable
Promissory Note
Advantages of Promissory Notes:
(1) Strengthens financial condition of the creditor;
(2) A negotiable PN could be used to pay debts, or collateral.
 c. Novation – change in credit agreement
*Dual function of Novation:
(1) Extinguish or modify
(2) Substitute

5. Deposit of durables and movables at the branch store - with promise that
surcharges and penalties would be suspended.
6. Debtor substitution – the debtor is replaced by another debtor with a more
establish credit reputation
7. Dacion en Pago
debtor who has a property securing the debt, sells the property to the creditor to settle his
debt; credit standing is not adversely affected.

“Article 1245. Dation in payment whereby property is alienated to the creditor in

satisfaction of a debt in money, shall be governed by the law of sales.”

e.g. D owes Php30,000. To fulfill the obligation, D with consent of C delivers a piano.

If the piano is worth less than Php30,000, the conveyance must be deemed to extinguish
the obligation to the extent only of the value agreed upon unless the parties by their
agreement have considered the piano as full payment, in which case, the obligation is
totally extinguished.

8. Addition or guarantor or surety

If the debtor has a lot of final difficulties, debtor substitution is not possible

Rationale:
Article 1236. creditor is not bound to accept payment by a third person unless stipulated
BECAUSE “a creditor should have the right to insist on the liability of the debtor” (Report
of the Code Commission, p.12)

9. Securitization – applies to unsecured credit obligations. The creditor may request the
debtor to collateralize his debt. To persuade the debtor, the creditor
may provide a generous term extension or possible condonation of
surcharges and penalties.

Advantages to Debtor:

 Discontinuation of collection pressure

 Opportunity to have plenty of time to reorganize his financial resources
 Opportunity to keep his credit reputation in tact

Advantages to Creditor:

 Protection of Asset
v There is a specific collection time frame and he may readjust his own
 resources accordingly.

RELEVANT LAWS AFFECTING CREDIT TRANSACTIONS

The following laws, in one way or the other, whenever and wherever applicable govern the
relationship between debtor and creditor, obligor and oblige, and other forms of credit
transactions.

1. The New Civil Code, specifically the following provisions:

a. Emancipation and Age of Majority – Arts. 397 to 406
b. Obligations and Contracts – Arts. 1156 to 1439
c. Sales – Arts. 1458 to 1638
d. Barter or Exchange – Arts. 1638 to 1641
e. Lease – Arts. 1642 to 1688
f. Partnership – Arts. 1767 to 1866
g. Agency – Arts. 1858 to 1932
h. Loan – Arts. 1933 to 1960
i. Deposit – Arts. 1962 to 1967
j. Compromise and Arbitrations – Art. 2028 to 2046
k. Guaranty – Arts. 2047 to 2081
l. Pledge, Mortgage, and Antithesis – Arts. 2085 to 2141
m. Concurrence and preference of credits – Arts. 2236 to 2251
2. Negotiable Instruments Law
3. Chattel Mortgage Law
4. Revised Penal Code
5. PD No. 22 on the New Bouncing Checks Law
6. Insolvency Law
7. Financing Law (RA 5980, as amended by RA 1454 (Usury Law)
8. Truth in Lending Act
9. Corporation Law
10. Warehouse Receipts Law
11. Banking and Retail Law
 12. The Rules of Court

The most frequently invoked laws in litigations arising out of credit transactions are BP 22
(Bouncing Checks Law) and Usury Law. These laws are discussed in details as follows:

BP 22
Bouncing
Checks Law

*Checks – a written request or order by a depositor called the “drawer” to a bank, called the
“drawee,” to pay on encashment a person called a “payee,” a certain sum of money.

*Bouncing check – check that has no funds or credit to cover its amount i.e. DAIF (drawn
against insufficient fund check) or NSF (no-sufficient fund check).

*Post dated check – one that is dated after it is issued and delivered

*Reason for enactment – Art. 315, Par 2 d of the RPC does not include in the crime of
estafa the act of issuing a bounced check in payment of pre-existing obligation.

*Purpose of BP 22 – to put a stop to the harmful practice of circulating worthless check

which when multiplied a thousand fold, can very well pollute the channels of trade and hurt
the welfare of society and public interest. (Pp. vs. Lozano)

*Constitutionality – BP 22 is a fundamental exercise by the state of its police power or to

pass laws that will promote health, morals and general welfare of the people. What BP 22
punishes is the issuance of a worthless check and not the non-payment of debt.
- it does not violates the non – impairment clause because checks are not merely
contract but are substitute for money. They form part of the banking system and not entirely
free from the regulatory power of the state.

*Checks covered - present-dated or post- dated, issued to apply on account (to pay
a pre- existing obligation), or for value (given in mutual or simultaneous exchange for
 something of value), guarantee, accommodation or deposit checks, memorandum and a
foreign checks

 Acts Punished

1. Issuing any check to apply on account or for value, knowing at the time of issue that he does
not have sufficient funds with the d bank for payment of such checks upon presentment,
which check is subsequently dishonored by the bank for insufficiency of funds or would have
been dishonored for the same reason had not the drawer, without any valid reason, ordered the
bank to stop payment.

 Elements
1. A person issues any check.
2. Check is made to apply on account or for value.
3. The person knows at the time of issuance that he does not have sufficient funds with the
bank.
4. The check is subsequently dishonored, or would have been dishonored for the same
reason had not the drawer, without any valid reason, ordered the bank to stop payment.

2. Having sufficient funds with the bank when he issues a check, but failed to keep sufficient
funds to cover the full amount of the check if presented within a period of 90 days from the
date appearing thereon for which reason it is dishonored by the bank.

Elements
1. The person has sufficient funds in the bank when he issues a check.
2. He fails to keep sufficient funds to cover the full amount of the check if presented within
90 days from the date thereon.
3. The check is dishonored.

Imposable Penalties
1. Imprisonment of not less than 30 days but not exceeding 1 year.
2. Fine of not less than but not more than double the amount of the check, which shall
not to exceed Php 200,000
3. Both imprisonment and fine.

*Circular # 12-2000

- if there is good faith or a clear mistake on the part of the accused and he is a
first time offender or the issuance of the check was the offshoot of a legitimate business
transaction, imposition of fine alone should be considered as the more appropriate
penalty.

*Circular #13-2001
 - It clarifies that circular # 12-2000 does not remove imprisonment as an
alternative penalty for violations of BP22. It also stated that circular #12-2000 does not
remove imprisonment as an alternative penalty but merely lays down a rule of preference
in the application of the penalties.

*Persons Liable

Personal checks – the signatory or the signatories

Corporate checks – the person or persons who actually signed the bounced check.

 Lina Lim Lao vs. Court of Appeals – the SC underscored the point that being a signatory
to the dishonored corporate checks nearly engenders the prima facie presumption that as
officer of the corporation, the accused who co-signed the check knew of the
insufficiency of funds. It does not, however, make the accused automatically guilty under
BP22.

*Rule on Notice of Dishonor

 Corporate checks – Responsibilities under BP22 is personal to the accused so that the
latter’s own knowledge of the dishonor is necessary. Constructive notice to the
corporation, as when the demand was sent to the main and not to its extension office
where the accused was on field duty is not enough to satisfy due process. Notice to the
corporation which has a personality distinct and separate from the officer who issued the
check is not tantamount to notice to the latter. (Lina Lim Lao vs. CA)
 The insufficiency of funds shall be explicitly stated in the dishonor, hence, a mere oral
notice or demand to pay is sufficient for conviction under BP22 (Domagsang vs. CA)
 A signatory to the check who was not informed of the dishonored is not liable.

*Valid Defenses against BP 22

 Lack of notice of Dishonor – failure to notify the accused of the dishonor of the
checks will defeat the presumption of knowledge of insufficiency of funds.

 Forgery – a check is forged when the signature appearing thereon was made without the
authority of the person whose signature appears it. In the case of PNB vs. CA, the
SC decided that the dishonor of a check is a defense when the stop payment
requested by the drawer was due to forgery in the endorsement of a lost check.

 Prescription – termination of the right or power to prosecute or punish the

 offender after the lapse of a definite period from the commission of the crime, or if not
known, from the day of its discovery. BP22 prescribes after 4 years beginning from the
lapse of 5 banking days from notice of dishonor.

 Duplicity of Offense – a single information charges more than one offense. Duplicity
is a defense in BP 22 if there is also an information for estafa that embodies all the
elements of any of the offenses punishable under BP22.

 Failure to bring the accused for trial within the time limit set by the Speedy
Trial Act and Rules of Criminal Procedure. (Rule 119, Sec 9, Rules of Criminal
Procedure)

 Failure to present the checks for payment within 90 days from the date of
issue.

 Lack of the necessary Signature/s – as to corporate, association or partnership check

wherein particular officers are authorized signatories, proof that not all of such authorized
signatories or less that that required have signed the check is a defense. The incompleteness or
unauthorized drawing of the check did not make the check a valid order to the bank to pay. As a
result, the drawer is not under obligation to deposit
or maintain sufficient funds for its payment.

 Dishonor with a mere stamp in the check “stop payment” – the bank is
directed as well to state in the notice of dishonor even against a “stop payment” that there
were no sufficient funds in or credit with it to pay the check.

 Lack, or illegal consideration in the issuance of the check – the Supreme

Court held in the case of Igos vs. Court of Appeals that malice or intent is immaterial, the
offense being malum prohibitum, “could not be an absolute proposition without
desending to absurdity.” Also in the earlier case of Magno vs. Court of Appeals, the SC
will not limit itself to determining the commission of the prohibited act. It must go one
step backward by ascertaining the nature of the transaction under which the check was
issued not only to find out if the same was drawn for an actual valuable consideration,
but also to determine, who, between the drawer and the payee, is the actual and potential
wrong-doer. Hence, if a check were issued by a kidnap victim to the kidnapper for
ransom, it would be unseemly to hold the drawer liable if the check was dishonored and
unpaid.

Usury Law
(Act 2655, as amended by Presidential Decree No. 116)

The Usury Law is Act 2655, as amended by Presidential Decree No. 116, which provides,
among others, that the legal rate of interest for the loan or forbearance of any money, goods or
credits, where such loan or renewal or forbearance is secured in whole or in part by a mortgage
upon real estate the title to which is duly registered, in the
absence of express contract as to such rate of interest, shall be 12% per annum. Any amount of
interest paid or stipulated to be paid in excess of that fixed by law is considered usurious,
therefore unlawful.

However, pursuant to Central Bank Circular No. 905, adopted on 22 December 1982, the
Supreme Court declared that the Usury law is now "legally inexistent".It should be clarified that
CB Circular No. 905 did not repeal nor in anyway amend the Usury Law but simply suspended
the latter's effectivity. Usury has been legally non-existent in our jurisdiction. Interest can now be
charged as lender and borrower may agree upon.

Usury is defined as:

 Contracting for or receiving something in excess of the amount allowed by law for
the forbearance of money, goods or things in action
 Any amount of interest paid or stipulated to be paid in excess of that fixed by law.

Background

 Taking of excessive interest for the loan of money has been regarded with abhorrence
from the earliest times – prohibited by the ancient laws of the Chinese and Hindus,
the Mosaic Law of the Jews, by the Koran, by the Athenians and by the Romans and
has been frowned upon by distinguished publicists throughout all the ages.

 The early American colonial usury acts were modeled after the English act, the rate of
interest allowed being usually higher. These early enactments adopted the penalty for
usury fixed by the statue of the mother country. The tendency of subsequent statutes
has been steadily to mitigate the punishment inflicted on the usurer.

 The illegality of usury is now wholly a creature of legislation. The Philippine statute
on the subject is Act No. 2655. It is a drastic law following in many respects the most
advanced American Legislation. Central Bank Circular No. 905 simply suspended the
effectivity of the Usury Law, it did not repeal or in any way suspend the Usury Law.
Only a law can repeal another law.

Usury Law

 The Usury Law is Act 2655, as amended by Presidential Decree No. 116, which
 provides, among others, that the legal rate of interest for the loan or forbearance of
any money, goods or credits, where such loan or renewal or forbearance is secured in
whole or in part by a mortgage upon real estate the title to which is duly registered, in
the absence of express contract as to such rate of interest, shall be 12% per annum.
Any amount of interest paid or stipulated to be paid in excess of that fixed by law is
considered usurious, therefore unlawful.
 Usury law has been enacted for the protection of the borrower from the imposition of
unscrupulous lenders who are ready to take undue advantage of the necessities of
others. It forms a part of the public policy of the state, and is intended to prevent
excessive charges for the loan of money.
 It proceeds on the theory that a usurious loan is attributable to such inequality in the
relation of the lender and borrower that the borrower’s necessities deprive him of
freedom in contracting and place him at the mercy of the lender.
 Pursuant to Central Bank Circular No. 905, adopted on 22 December 1982, the
Supreme Court declared that the Usury law is now "legally inexistent". Under the
authority.

SECTION 1.

 The rate of interest, including commissions, premiums, fees and other charges, on a
loan or forbearance of any money, goods, or credits, regardless of maturity and
whether secured or unsecured, that may be charged or collected by any person,
whether natural or juridical, shall not be subject to any ceiling prescribed under or
pursuant to the Usury Law, as amended.

SECTION 2.

 The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of express contract as to such rate of
interest, shall continue to be twelve per cent (12%) per annum.

It should be clarified that CB Circular No. 905 did not repeal nor in anyway amend the Usury
Law but simply suspended the latter's effectivity. Usury has been legally non- existent in our
jurisdiction. Interest can now be charged as lender and borrower may agree upon.

Elements:
1. Loan or forbearance.
2. An understanding between the parties that the loan shall or may be returned.
3. Unlawful intent to take more than the legal rate for the use of money.
 4. Taking or agreeing to take for the use of the loan of something in excess of what is
allowed by law.

 To determine whether all of these elements is present, the court will disregard the
form which the transaction may take and look only upon its substance.

Interest Rates under the Usury Law:

 With the suspension of the Usury Law and the removal of interest ceilings, the parties
are generally free to stipulate the interest rates to be imposed on monetary obligations.
As a rule, the interest rate agreed by the creditor and the debtor is binding upon them.
This rule, however, is not absolute. The striking down of unconscionable interest is
based on Article 1409 of the Civil Code, which considers certain contracts as
inexistent and void from the beginning, including: "Those whose cause, object or
purpose is contrary to law, morals, good customs, public order or public policy".

 In a recent case, the SC again dealt with the validity of interest agreed by the parties,
stating that:
Stipulated interest rates are illegal if they are unconscionable and the Court is
allowed to temper interest rates when necessary. In exercising this vested power to
determine what is iniquitous and unconscionable, the Court must consider the
circumstances of each case. What may be iniquitous and unconscionable in one case,
may be just in another.

 In that case, the SC reduced the interest rate from 18% to 12% per annum, noting,
among others, that the amount involved has ballooned to an outrageous amount four
times the principal debt. Indeed, there is no hard and fast rule to determine the
reasonableness of interest rates. Stipulated interest rates of 21%, 23% and 24% per
annum had been sustained in certain cases. On the other hand, there are plenty of
cases when the SC equitably reduced the stipulated interest rates; for instance, from
18% to 10% per annum. The SC also voided the stipulated interest of 5.5% per month
(or 66% per annum), for being “excessive, iniquitous, unconscionable and exorbitant,
hence, contrary to morals (contra bonos mores), if not against the law”. The same is
true with cases involving 36% per annum, 6% per month (or 72% per annum), and
10% and 8% per month. In these instances, the SC imposed the legal interest of 12%.
 “legal interest” doesn’t mean that anything beyond 12% is “illegal”. It simply means
that in a loan or forbearance of money, the interest due should be that stipulated in
writing, and in the absence thereof, the rate shall be 12% per annum.
Interest Rate Ceiling

 The Usury Law had been rendered legally ineffective by

Resolution No. 224 dated 3 December 1982 of the Monetary
Board of the Central Bank, and later by Central Bank Circular
No. 905 which took effect on 1 January 1983. These circulars
removed the ceiling on interest rates for secured and unsecured
loans regardless of maturity. The effect of these circulars is to
allow the parties to agree on any interest that may be charged
on a loan. The virtual repeal of the Usury Law is within the
range of judicial notice which courts are bound to take into
account. Although interest rates are no longer subject to a
ceiling, the lender still does not have an unbridled license to
impose increased interest rates. The lender and the borrower
should agree on the imposed rate, and such imposed rate
should be in writing.

Here, the stipulations on interest rate repricing are valid because (1) the parties
mutually agreed on said stipulations; (2) repricing takes effect only upon
Solidbank’s written notice to Permanent of the new interest rate; and (3)
Permanent has the option to prepay its loan if Permanent and Solidbank do not
agree on the new interest rate. The phrases “irrevocably authorize,” “at any time”
and “adjustment of the interest rate shall be effective from the date indicated in
the written notice sent to us by the bank, or if no date is indicated, from the time
the notice was sent,” emphasize that Permanent should receive a written notice
from Solidbank as a condition for the adjustment of the interest rates. (Solidbank
Corporation vs. Permanent Homes, Inc., G.R. No. 171925, July 23, 2010.)