Respond to Bank Demand Letter for Loan Non-Payment Philippines

Written By Harold Respicio

Responding to a Bank Demand Letter for Loan Non-Payment in the Philippines

A comprehensive legal-practical guide (2025 edition)

1. What a “Demand Letter” Means in Philippine Law

Concept Key Points
Purpose Puts the debtor in delay (mora) under Art. 1169 Civil Code, triggers accrued interest/penalties, and preserves the bank’s right to sue or foreclose.
Form & Content Usually on bank letterhead, cites the loan/promo­issory note, states outstanding balance + interest/penalties, invokes acceleration clause, sets a deadline, warns of legal action/foreclosure, may assign to a collection agency.
Service Delivered by courier, registered mail, personal service, or even e-mail/SMS per BSP Circular No. 1039 (2019) on electronic notices. Proof of receipt (registry return card, acknowledgment) is crucial if the matter reaches court.
Legal Basis Civil Code (Arts. 1169, 1170–1174), the loan/mortgage contract, BSP consumer-protection regulations, and—if collateral is real estate—Act No. 3135 (extrajudicial foreclosure) and Rule 68, Rules of Court (judicial foreclosure).

2. Immediate Steps Upon Receiving the Letter

  1. Stay calm and read it fully – note the due date in the letter, the amount claimed, and any threatened action (suit, foreclosure, credit-bureau reporting).

  2. Verify authenticity – call the bank’s official hotline, not any number on the letter if you suspect phishing.

  3. Gather documents

    • Promissory notes, loan disclosure, statement of account (SOA)
    • Official receipts or fund-transfer proofs
    • Collateral documents (real-estate mortgage, chattel mortgage, post-dated checks)

  4. Compute and reconcile – check:

    • Whether payments already made were posted late
    • Correctness of interest (NB: Usury was lifted in 1983 but BSP Circular 799 caps default interest at the rate agreed upon; courts frequently reduce unconscionable rates).

  5. Check prescription – written contractual debts prescribe after 10 years (Art. 1144), but each partial payment or written acknowledgment interrupts prescription (Art. 1155).

  6. Consult counsel or accredited public assistance – Public Attorney’s Office (PAO) or Integrated Bar of the Philippines (IBP) Legal Aid if resources are limited.

  7. Consider credit-bureau impact – under the Credit Information System Act (RA 9510), serious default reports remain up to five years.

3. Strategic Options

Option Advantages Caveats
Pay in full before the deadline Stops interest/penalties; avoids litigation & foreclosure; clears credit record quickly Requires liquidity; demand letter amount may need verification
Restructure or refinance Lower monthly amortization, possible interest reduction; banks often prefer workout to court action (BSP Circular 1133, 2022 “Loan Rehabilitation”). Usually need updated financials, collateral re-valuation; restructuring fee; whole balance still technically due if you default again
Settlement/compromise (lump sum <100%) data-preserve-html-node="true" Quicker closure; discounted payoff if loan already written off in the bank books Need negotiating leverage; must be in writing; BIR Documentary Stamp Tax implications
Dacion en pago (deed-in-payment) Transfer collateral (e.g., property) in exchange for extinguishment Needs fair appraisal; triggers capital-gains/VAT, DST, transfer taxes; bank board approval
Invoke consumer-protection remedies File complaint with BSP Financial Consumer Protection Department (RA 11765), or with SEC if the lender is an NBFI Does not stop running interest; bank can still sue while administrative case is pending
Raise legal defenses Prescription, payment, invalid acceleration, lack of SPA in mortgage, forgery, violation of Truth-in-Lending Act (RA 3765) disclosure, unconscionable interest, lack of notarial requirement for chattel mortgage Must be pleaded and proven in court; if weak, may prolong but not avoid liability

4. Drafting an Effective Response Letter

Tone: Courteous, factual, non-adversarial (courts disfavor “bad faith”). Timing: Send before the demand letter’s deadline or, if impossible, at least within 15 days of receipt.

Suggested structure

  1. Heading & reference – Date, your full name, loan account number, demand-letter reference.

  2. Acknowledgment – Confirm receipt and date received.

  3. Position –

    • If disputing: “I dispute the amount of PHP ___ for the following reasons…” (enumerate).
    • If requesting documents: “Please furnish a detailed SOA, payment ledger, and computation of interest and penalties.”

  4. Proposal – “I propose to settle by paying PHP ___ on or before ____, and the balance in __ monthly installments.”

  5. Supporting information – Recent payslips, financial hardship explanation, collateral valuation, or co-maker commitment.

  6. Legal reservation – “This letter is written without prejudice to my rights and defenses under Philippine law.”

  7. Signature & contact details.

Send via (a) registered mail with return card and (b) e-mail to the account officer to create traceable proof of service.

5. Consequences of Ignoring the Letter

  1. Acceleration & filing of collection suit – Bank may sue for sum of money (ordinary or small claims up to PHP 1 million) with 12% per annum legal interest (Nacar v. Gallery Frames, G.R. No. 189871, Aug 13 2013).
  2. Extrajudicial foreclosure – If there is a real-estate mortgage with a special power of attorney and the loan is at least 60 days past due (RA No. 3135). After auction sale, any deficiency may still be sued upon.
  3. Chattel-mortgage foreclosure – For auto or appliance loans; sheriff or notary-public sale under Act No. 1508. Often followed by deficiency action.
  4. Endorsement to a collection agency – BSP Circular 454 (updated by 702 & 795) bars threat, violence, public humiliation. Violations can be reported to BSP and DTI for unfair trade.
  5. Negative credit report – Under RA 9510, default data stays for five years from fully settled status; it affects future loans, telco postpaid, etc.
  6. Criminal action – Generally no imprisonment for non-payment of a purely civil loan (Art. III Sec. 20 Constitution). Exception: If you issued bounced checks under the loan (BP 22) or estafa if there is fraudulent intent.

6. Key Statutes, Rules, and Jurisprudence to Know

Source Relevance
Civil Code (Arts. 1155, 1169, 1170-1176, 1256-1261) Delay, interest, payment, dation in payment, compensation
Act No. 3135 (as amended by Act 4118) Extrajudicial foreclosure of real-estate mortgages
Rule 68, Rules of Court Judicial foreclosure procedure
Act No. 1508 (Chattel Mortgage Law) Personal-property collateral foreclosure
RA 3765 (Truth in Lending), BSP Circular 730 Mandatory disclosure of finance charges
RA 9510 (Credit Information System Act) Credit-reporting & data retention
RA 11765 (Financial Consumer Protection Act) Sets standards for fair collection, dispute resolution
Supreme Court cases Nacar v. Gallery Frames (legal interest); Spouses Abanes v. Philippine National Bank (dation); Luzon Dev’t Bank v. Enriquez (deficiency after foreclosure); Spouses Castro v. Tan (usurious/unconscionable interest).

7. Negotiation & Restructuring Mechanics

  1. Prepare a cash-flow statement – shows your capacity and basis for the re-amortization schedule.

  2. Bank’s internal approval – Account officer elevates to Credit Committee; expect 2–4 weeks processing.

  3. Documentation –

    • Loan Restructuring Agreement (LRA)
    • New promissory note with revised terms
    • Amended mortgage or continuation of REM annotated on TCT

  4. Fees & taxes – Restructuring fee (0.5–1% of balance), notarial, registration, DST on new loan amount.

  5. Post-approval conditions – Auto-debit enrollment, updated insurance, post-dated checks, or salary deduction authorization.

  6. Reporting – Restructured status reported to the Credit Information Corporation; better than “past due” but still viewed cautiously by lenders.

8. Defenses & Counter-Strategies in Litigation

  • Payment or partial payment – keep receipts; ask court to recompute.
  • Invalid acceleration – if no clear clause, bank must still wait for maturity of each installment (Spouses Abesamis v. CA).
  • Unconscionable interest – courts can reduce to 6% or 12% p.a. (Art. 1229).
  • Prescription – raise as affirmative defense in Answer; burden on debtor to plead.
  • Lack of notarization – chattel mortgage unenforceable vs. third parties if unregistered; but still valid between parties.
  • Violation of special laws – e.g., no Truth-in-Lending disclosure; can be used to impeach bank’s good faith.

9. Administrative & Alternative Remedies

  1. Bangko Sentral ng Pilipinas (BSP)

    • File complaint via Consumer Assistance Mechanism (CAM) then Elevated Dispute Resolution (EDR) per BSP Circular 1169 (2023).
    • BSP may order corrective action, refund of excessive charges, penalties on bank.

  2. Mediation & Arbitration

    • PDRC or CBMC centers; some loan contracts require prior mediation.
    • Quicker (30–60 days) and confidential; award is enforceable under ADR Act (RA 9285).

  3. SEC (for financing and lending companies)

    • SEC Oversight Division can suspend collection if lender violated Lending/Financing Company Acts.

  4. Small Claims Court (A.M. 08-8-7-SC, as amended)

    • If bank sues for ≤ PHP 1 million, no lawyers allowed; debtor can raise defenses personally.

10. Best-Practice Checklist for Borrowers

  • Log the date and mode of receipt of the demand letter.
  • Pull complete loan documents & ledgers within 5 days.
  • Consult counsel or a certified public accountant for recomputation.
  • Draft and send a response letter within the deadline.
  • Decide on pay-off, restructuring, or dispute route; begin negotiations.
  • Keep written minutes of all calls/meetings with bank officers.
  • If harassment occurs, document calls/messages and report to BSP/DTI.
  • Monitor credit score/report after settlement.
  • Follow through on agreed payment schedule; a second default after restructuring often leads to faster foreclosure.

Final Takeaway

A demand letter is not yet a lawsuit—it is an invitation (and legal trigger) to cure default. Respond promptly, know your rights under Philippine law, keep meticulous records, and explore settlement or restructuring before matters escalate to court or foreclosure. Being proactive, transparent, and legally informed often results in significant savings and preservation of credit standing.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

Harold Respicio
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