Legal Options for Installment Payments on Foreclosed Property Arrears in the Philippines
All You Need to Know

Foreclosure is a legal process by which a creditor (usually a bank or financing institution) takes possession of mortgaged real property when the borrower fails to meet payment obligations. In the Philippines, foreclosure proceedings can be judicial (done through the courts) or extrajudicial (done by a notary public or sheriff under a “power of sale” clause in the mortgage contract). Either way, if you have fallen behind on payments for real property bought on installment or mortgaged to a lending institution, there are legal remedies and options available to you. This article provides an overview of the relevant laws and regulations, the rights of debtors and property buyers, and the ways to manage arrears through installment payment schemes or related remedies.

1. Key Laws Governing Foreclosures and Installment Sales

Act No. 3135 (as amended by Act No. 4118)
- Governs extrajudicial foreclosure of real estate mortgages.
- Authorizes the creditor (mortgagee) to foreclose and sell the mortgaged property at a public auction if there is a “power of sale” clause in the mortgage contract.
The Maceda Law (Republic Act No. 6552), also known as the Realty Installment Buyer’s Protection Act
- Protects buyers of real estate on installment basis (such as under a Contract to Sell with a real estate developer) from “one-sided” cancellations due to default.
- Provides certain rights to delinquent buyers, including a grace period to pay arrears, refund entitlements, and other protective measures.
Presidential Decree No. 957 (P.D. 957) and Batas Pambansa Blg. 220
- Primarily govern subdivision and condominium developments. While they do not focus solely on arrears or foreclosure, they set standards for developers and protect buyers in large-scale real estate transactions.
- If your purchase is part of a subdivision or condominium project, these laws interplay with the Maceda Law.
Civil Code provisions on mortgages and contracts
- General rules on obligations, contracts, and remedies in case of default.
- Supplements specific foreclosure laws.

2. Difference Between Mortgage Contracts and Installment Sales

Understanding whether you are dealing with a mortgage contract or an installment sales contract (such as a Contract to Sell) is crucial:

Mortgage Contract with a Bank or Financing Institution
You already own the property (title may be in your name, but mortgaged to the bank). Defaulting on loan repayments can trigger foreclosure proceedings under Act No. 3135.
Installment Sales Contract (Contract to Sell)
The seller (often a real estate developer) typically retains the title until full payment. Upon default, the seller may cancel the contract. The Maceda Law (R.A. 6552) provides certain rights and redemption or grace periods for buyers under default.

Your legal options and the nature of your arrears payment plan will vary depending on which scenario you fall under.

3. Understanding Arrears and the Foreclosure Timeline

3.1 Default and Notice Requirements

Before any foreclosure or contract cancellation, the creditor or seller must usually send formal notices of default.
Extrajudicial Foreclosure: Under Act No. 3135, notice of auction sale is published in a newspaper of general circulation for a specified period (usually three consecutive weeks), and notice is posted in public places.
Judicial Foreclosure: The creditor files a case in court. If the borrower (mortgagor) fails to answer or settle, the court can order the sale of the property at public auction.

3.2 Redemption Period

Extrajudicial Foreclosure: Generally, the mortgagor has one (1) year from the date of registration of the Certificate of Sale to redeem the property. The redemption price includes the purchase price at auction plus interest and other charges allowed by law.
Judicial Foreclosure: The mortgagor’s right of redemption is up to the time the court issues an order confirming the foreclosure sale (sometimes called the equity of redemption). After confirmation, the right to redeem is cut off, unless a specific law (like in the case of bank foreclosures under special charters) grants a post-sale redemption.

3.3 Effect of Foreclosure on Arrears

Once foreclosure is initiated, simply catching up on missed installments may not always stop the process. However, if the creditor agrees or if the law provides a grace period (especially under the Maceda Law for installment sales), you may have a window to cure the default.

4. Legal Options for Installment Payments on Arrears

4.1 Renegotiation or Restructuring of the Mortgage (Bank Loans)

Many banks or financing institutions in the Philippines will consider a loan restructuring or refinancing arrangement. This involves:

Extension of Payment Terms: The unpaid loan balance is recalculated over a longer period, reducing monthly amortizations.
Grace Period: Sometimes, banks can provide a brief moratorium to allow a borrower to catch up.
Consolidation of Arrears: Past due amounts are capitalized (added to the principal), leading to a new amortization schedule.

How to Avail:

Communicate proactively with your bank or financing institution.
Submit financial documents showing capacity to meet the restructured payments.
Sign a restructuring agreement, which typically “resets” the loan but may carry additional fees or higher interest rates.

Advantages:

Avoids imminent foreclosure.
Gives the borrower a second chance to maintain property ownership.

Disadvantages:

Possible increase in total interest paid due to extended terms.
Requires lender’s approval and usually evidence of improved financial capacity.

4.2 Right to Cure Default under the Maceda Law (Installment Sales)

If you are buying property on installment and have paid at least two (2) years of installments, Section 3 of the Maceda Law gives you the following rights:

Grace Period: You are entitled to a one-time extension of 60 days (the law states “not less than sixty days”) for every one year of paid installments, and in no case shall the total grace period exceed the equivalent of the installments paid.
Refund Entitlement: If the seller still cancels the contract and you have paid at least two years of installments, you are entitled to 50% refund of the total payments made. If you have paid beyond five years of installments, the refund is increased by 5% per year, up to a maximum of 90%.

If you have paid less than two (2) years of installments, the seller must still give you at least a 60-day grace period from notice to settle your arrears before canceling. However, you do not receive a refund if you still fail to pay within that grace period.

How to Avail:

Secure a copy of your Contract to Sell to confirm that it indeed qualifies under the Maceda Law.
Send a written request (or respond to the developer’s notice) indicating your intention to exercise your “right to cure” or to pay arrears within the grace period.

Practical Tip: Document every communication and payment. If the developer refuses to honor your Maceda Law rights, you may seek assistance from the Housing and Land Use Regulatory Board (HLURB), now known as the Department of Human Settlements and Urban Development (DHSUD).

4.3 Payment Arrangements Before Auction Sale

For Mortgages (Bank Loans):
Even after foreclosure notice has been issued, you can still negotiate directly with the bank or lender before the public auction to:

Pay the arrears in full plus charges and penalties.
Execute a dacion en pago (“payment in kind”): This is where you voluntarily surrender the property to the bank in exchange for cancellation of the debt. If the property is worth more than the debt, you may negotiate the excess.

For Installment Sales (Contract to Sell):
If you are still within the grace period provided by Maceda Law (or if the developer voluntarily extends one), you can settle the unpaid dues. The developer must accept payment and reinstate your contract.

5. Remedies After Foreclosure Sale or Cancellation

5.1 Redemption of the Property

Extrajudicial Foreclosure: The one-year redemption period allows you to buy back your property from the winning bidder by paying the auction price plus interest and expenses.
Judicial Foreclosure: If the foreclosure was via court proceedings, you typically have equity of redemption up to the court confirmation of the sale—unless a law (like for bank foreclosures under special charters) extends that.

5.2 Legal Action to Nullify Irregularities

If there were procedural defects in the foreclosure (e.g., improper publication of notice, violation of your rights under Maceda Law, lack of notice), you could file a court action for injunction, annulment of sale, or damages. You must be prepared for litigation costs and be mindful of filing periods.

6. Practical Tips and Best Practices

Communicate Early and Often: The first step to avoiding foreclosure or contract cancellation is open communication with your bank, financing institution, or real estate developer.
Secure and Organize Documentation: Keep all contracts, notices, receipts, and communications in order. This can be crucial if you need to prove your payments or challenge an irregular foreclosure procedure.
Explore Refinancing or Restructuring: If your financial hardship is temporary, many lenders are open to restructuring deals rather than going through the foreclosure process.
Invoke the Maceda Law (if applicable): Know your rights under R.A. 6552 if you are on an installment scheme with a developer. You might have a valid grace period or refund entitlement.
Seek Professional Advice: Foreclosure and real estate laws can be complex. Consider consulting a lawyer to ensure you fully understand your rights and obligations.
Avoid Last-Minute Actions: Redemption periods and grace periods are time-bound. Act promptly to preserve your rights.

7. Frequently Asked Questions (FAQs)

Q1: Can I still pay my arrears in installments once the foreclosure process has started?
A1: Yes, if the lender agrees. Banks sometimes permit partial catch-up payments or restructure the loan. For installment sales protected by the Maceda Law, you can pay arrears within the legal grace period. Otherwise, you must pay the total arrears plus penalties to stop the foreclosure or contract cancellation.

Q2: Does the Maceda Law apply to all real estate transactions?
A2: It applies to sales of real estate on installment payments (often from developers or sellers) involving residential properties. It does not apply to raw land for agricultural or commercial use only, or to transactions where the buyer pays cash or a lump sum without installments.

Q3: What happens if I fail to redeem within one year (extrajudicial foreclosure)?
A3: If you do not redeem within the statutory period, the title is consolidated in the name of the buyer at the foreclosure sale (often the bank). You lose all rights to the property, and the buyer (or bank) can have the property registered under its name.

Q4: Are there penalties or additional interest on top of the arrears?
A4: Yes. Most mortgage contracts and installment contracts impose penalty charges and additional interest if payments are delayed. The exact amount or rate is usually stipulated in the contract or loan agreement.

Q5: Can the bank immediately evict me once the foreclosure sale is concluded?
A5: Typically, not immediately. There is a process for transferring possession, and if there is a redemption period, you still retain the right to stay until it expires. If the property is not redeemed, the purchaser can then take steps to consolidate title and possibly evict the former owner. For judicial foreclosures, a court order may be necessary before eviction or issuance of a writ of possession.

8. Conclusion

Falling into arrears on property payments is a stressful situation, but Philippine law provides several legal options for individuals or families to manage their debts, avoid (or delay) foreclosure, and, under certain circumstances, redeem their properties. Whether you are dealing with a bank mortgage or an installment sale contract with a real estate developer, it is crucial to act swiftly, understand your rights (especially under the Maceda Law, if applicable), and communicate effectively with the creditor or seller.

The most proactive step is to negotiate and restructure your payment scheme while the delinquency is manageable, rather than waiting until the foreclosure or cancellation process is too far along. If foreclosure has commenced, be mindful of notice requirements, publication rules, and redemption periods. In all cases, consulting with a qualified lawyer will help you protect your interests, ensure proper procedural compliance, and possibly secure a mutually beneficial arrangement to preserve your property rights.