Liabilities of a Guarantor When Debtor Defaults on Car Loan in the Philippines

 

Here's a comprehensive legal article on the topic:

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Liabilities of a Guarantor When a Debtor Defaults on a Car Loan in the Philippines

I. Introduction

In the Philippines, securing a car loan often requires a guarantor or co-maker to increase the lender’s confidence in repayment. However, many guarantors do not fully understand their legal obligations when the debtor defaults. This article explores the liabilities of a guarantor under Philippine law, particularly under the Civil Code of the Philippines, jurisprudence, and relevant banking practices.

II. Definitions and Legal Basis

A. What Is a Guarantor?

A guarantor is a person who promises to pay a debt if the principal debtor fails to do so. The relationship is governed by Article 2047 of the Civil Code, which states:

"By guaranty, a person binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so."

B. Guarantor vs. Co-Maker vs. Surety

• A guarantor is only liable after the creditor has exhausted all means to collect from the principal debtor.
• A co-maker is jointly responsible for the loan and is treated like a co-borrower.
• A surety is solidarily liable, meaning the creditor can demand payment directly from the surety without exhausting remedies against the principal debtor.

III. Legal Liabilities of a Guarantor When the Debtor Defaults

Once a debtor defaults on a car loan, the guarantor’s liabilities activate, subject to the following rules:

A. Benefit of Excussion (Article 2058, Civil Code)

A guarantor can only be compelled to pay if the creditor has first tried all legal means to collect from the principal debtor. This is called the “benefit of excussion.”

Exceptions to Excussion:

The guarantor cannot demand excussion if:

1. They waived this right in the contract.
2. The debtor is insolvent or bankrupt.
3. The debtor cannot be sued within the Philippines.
4. The obligation is solidary (i.e., a surety agreement instead of a guaranty).

If any of these exceptions apply, the creditor may demand payment from the guarantor immediately.

B. Extent of Liability

A guarantor is only liable for the amount guaranteed. If the loan contract specifies a limit, the guarantor cannot be asked to pay beyond that amount. However, if the guarantor signed an “all-inclusive” guarantee, they may also be liable for penalties, interest, and attorney’s fees.

C. Right to Reimbursement from the Debtor (Article 2066, Civil Code)

Once a guarantor pays the loan, they gain the right to demand reimbursement from the debtor for:

• The full amount paid.
• Interest on the amount paid.
• Legal expenses incurred in recovering the money.

If the debtor refuses to reimburse, the guarantor may file a civil case against the debtor for recovery.

IV. Consequences for the Guarantor in Case of Non-Payment

If the guarantor does not pay after the creditor has exhausted all means against the debtor, the following may happen:

1. Court Litigation – The creditor may file a collection case against the guarantor.
2. Asset Seizure (Levy & Execution) – If the court rules against the guarantor, their personal assets (real estate, bank deposits, etc.) may be garnished or sold to satisfy the debt.
3. Credit Score Impact – Defaulting on the obligation may result in a negative credit report under the Credit Information Corporation (CIC), affecting future loan applications.

V. Defenses Available to the Guarantor

A guarantor may legally avoid liability under certain defenses:

1. The debt is already paid.
2. The contract was altered without the guarantor’s consent.
3. The principal debtor’s obligation is void or illegal.
4. The creditor did not first pursue remedies against the principal debtor (except where excussion does not apply).
5. The obligation has already prescribed (statute of limitations applies).

VI. How to Protect Yourself as a Guarantor

1. Read the contract carefully. Check whether it is a guaranty or surety agreement before signing.
2. Negotiate limits on the amount guaranteed.
3. Ask for collateral from the debtor as security in case you need to pay.
4. Keep records of payments and communication with both the lender and debtor.
5. If sued, consult a lawyer immediately.

VII. Conclusion

Becoming a guarantor for a car loan is a serious legal responsibility under Philippine law. While the benefit of excussion provides some protection, creditors can enforce payment under various circumstances. Guarantors should fully understand their rights and obligations before signing any agreement to avoid unexpected financial burdens.