Liability of co-makers in loan collateral disputes in the Philippines

Liability of Co-Makers in Loan Collateral Disputes in the Philippines
Everything You Need to Know

Disclaimer: This article is for general informational and educational purposes only. It should not be taken as legal advice. If you need advice about a specific legal matter, you should consult a qualified attorney.

1. Introduction

When individuals or businesses apply for loans in the Philippines, lenders (such as banks, government lending institutions, or private financing entities) often require the borrower to secure the loan with collateral or to have one or more co-makers. A co-maker is someone who signs alongside the principal borrower to guarantee or share liability for loan repayment. In a dispute over the collateral (or in the event of the borrower’s default), questions often arise regarding a co-maker’s liability. Understanding the nature of these obligations and the relevant legal principles is critical for both lenders and co-makers to protect their rights.

This article provides an in-depth look at:

  1. Definition of a co-maker
  2. Legal framework and relevant laws
  3. Distinguishing a co-maker from a guarantor or surety
  4. Extent and nature of a co-maker’s liability
  5. Implications in collateral disputes
  6. Remedies and defenses
  7. Practical considerations and tips

2. Definition of a Co-Maker

A co-maker is a person who, along with the principal borrower, signs a promissory note or loan agreement. By signing, the co-maker agrees to be responsible for the debt if the principal borrower fails to pay. While the term “co-maker” is sometimes used interchangeably with “co-borrower” or “surety,” Philippine jurisprudence and lending practices may impose certain nuances or distinctions in each term’s usage:

  • A co-borrower usually shares in the purpose of the loan and directly benefits from the loan proceeds.
  • A co-maker, in strict usage, typically assists the principal borrower in securing the loan but may or may not directly benefit from it.
  • A surety is solidarily liable with the principal debtor, meaning the creditor can demand payment from either the debtor or the surety without exhausting the assets of the principal debtor first.
  • A guarantor generally has the benefit of excussion, meaning the creditor must first attempt to collect from the principal debtor before proceeding against the guarantor, unless there is a stipulation to the contrary.

However, in actual lending practice in the Philippines, the terms “co-maker” and “surety” often overlap. Lenders usually regard co-makers as equally liable with the principal borrower, especially if the loan contract stipulates solidary liability.

3. Legal Framework and Relevant Laws

The liability of co-makers is primarily governed by the Civil Code of the Philippines, particularly the provisions on Obligations and Contracts (Articles 1156 to 1304). Key principles include:

  1. Solidary vs. Joint Obligations

    • Under Articles 1207 to 1222 of the Civil Code, when two or more debtors are liable in solidum, the creditor may proceed against any one of them for the entire obligation.
    • If the obligation is joint, each debtor is only liable for a proportionate share.
    • Many loan agreements explicitly stipulate that the co-maker is “solidarily liable” with the principal borrower.

  2. Suretyship and Guarantee

    • Articles 2047 to 2084 of the Civil Code deal with guarantee and suretyship.
    • Although the code distinguishes between a guarantor (with the right of excussion) and a surety (solidarily liable), many co-maker clauses effectively create a suretyship relationship.

  3. Loan Documentation Requirements

    • Under banking regulations (e.g., Bangko Sentral ng Pilipinas circulars and guidelines), lenders must clearly outline the terms, obligations, and liabilities of co-makers in the loan documents.

  4. Judicial Interpretations

    • Philippine Supreme Court rulings affirm that where the contract states the co-maker is “jointly and severally” liable, the co-maker is effectively a surety, hence subject to the same remedies available to the creditor as against the principal borrower.

4. Distinguishing a Co-Maker from a Guarantor or Surety

In everyday practice, “co-maker,” “guarantor,” and “surety” terms can blur. The critical legal distinction often depends on the precise wording of the loan documents:

  • Guarantor:

    • Typically has the benefit of excussion, meaning the creditor must first exhaust the principal debtor’s assets before going after the guarantor.
    • If the agreement does not remove this benefit, the guarantor’s liability only arises after the principal debtor fails and the principal debtor’s resources have been exhausted.

  • Surety (or Solidary Co-Maker):

    • Solidarily liable with the principal borrower from the moment the loan is signed.
    • The creditor can immediately demand payment from the surety in case of default, without first exhausting the borrower’s assets.

  • Co-Maker (Practice-Based Understanding):

    • Often used to indicate someone who is either a surety or co-borrower.
    • Many Philippine loan agreements explicitly state “joint and several” liability, effectively treating the co-maker as a surety.
    • Check the specific clauses in the loan contract to determine whether the co-maker’s liability is indeed solidary or merely joint.

5. Extent and Nature of a Co-Maker’s Liability

The extent of a co-maker’s liability usually depends on the loan contract. Common scenarios include:

  1. Solidary Liability

    • If the agreement says “the co-maker is jointly and severally liable,” the creditor can choose to pursue the co-maker immediately for the entire obligation if the borrower defaults.
    • The co-maker, after paying the creditor, may seek reimbursement from the principal borrower.

  2. Joint Liability

    • If the contract provides only for joint liability, each debtor may be liable only to the extent of his or her share.
    • Pure “joint” liability is less common in commercial practice, as lenders generally want the broadest protection.

  3. Liability Limited to a Certain Amount

    • Sometimes, the contract limits a co-maker’s maximum liability to a specific amount (e.g., up to 50% of the principal loan).
    • Lenders, however, typically prefer an unlimited or full guarantee for easier recovery.

  4. Impact of Collateral

    • Even if there is real estate, chattel mortgage, or other collateral, if the borrower defaults and the collateral is insufficient to cover the debt, the co-maker may be held liable for the deficiency, assuming solidary liability.

6. Implications in Collateral Disputes

6.1. Foreclosure and Deficiency

When a borrower pledges collateral (e.g., real property via a real estate mortgage, or a car or equipment via a chattel mortgage) and subsequently defaults:

  1. Foreclosure

    • The lender may foreclose on the mortgaged property.
    • If the proceeds of the foreclosure sale do not fully satisfy the outstanding obligation, the creditor can pursue the co-maker for the deficiency.

  2. Collateral Disputes

    • There may be situations where the validity or enforceability of the collateral agreement is challenged (e.g., allegations of fraud, lack of authority to mortgage, improper documentation).
    • Regardless of the dispute over the collateral, if the loan agreement states the co-maker is solidarily liable, the lender can bypass the collateral issue and directly pursue the co-maker.

6.2. Fraud or Lack of Consent

  • If a co-maker’s signature was obtained through fraud or without proper authority, that co-maker may raise these as defenses.
  • However, allegations of fraud must be proven with clear and convincing evidence. A mere claim that “I did not understand what I was signing” is usually insufficient if the loan documents are regular on their face and the co-maker acknowledged them before a notary public or authorized representative.

6.3. Disputes over Loan Proceeds

  • Sometimes, co-makers argue they never received or benefited from the loan proceeds.
  • Philippine courts often hold that whether or not the co-maker directly benefited is immaterial if the contract clearly stipulates the co-maker is solidarily liable.

7. Remedies and Defenses for Co-Makers

When a lender sues a co-maker for payment, the co-maker has certain rights and possible defenses:

  1. Reimbursement or Contribution

    • If the co-maker pays the entire debt, they may claim reimbursement from the principal borrower (and possibly from other co-makers if multiple).
    • This right is rooted in the concept of subrogation under the Civil Code: once a co-maker settles the debt, the co-maker essentially steps into the shoes of the creditor against the principal debtor.

  2. Defenses Arising from the Nature of the Obligation

    • If the contract was for a limited guarantee and the lender demands more than the stipulated amount, the co-maker can raise this limitation.
    • If the contract indicates “joint” rather than “solidary” liability, the co-maker may resist paying more than their proportionate share.

  3. Defenses Personal to the Co-Maker

    • If there was fraud or duress in obtaining the co-maker’s signature.
    • If the co-maker can prove forgery or lack of authority (e.g., signature was falsified).
    • If the co-maker is a minor or lacks capacity to contract.

  4. Defenses Based on Improper Handling of Collateral

    • In certain cases, if the creditor negligently handles, disposes of, or fails to foreclose on the collateral, the co-maker may argue that the creditor’s actions increased the liability.
    • However, such defenses are not always upheld if the co-maker voluntarily assumed solidary liability.

8. Practical Considerations and Tips

  1. Before Signing as a Co-Maker

    • Read the loan agreement thoroughly.
    • Confirm if the wording states “joint” or “solidary” (joint and several) liability.
    • Check if there is a limitation or ceiling on the liability.

  2. Understand the Collateral Setup

    • Request copies of the mortgage or pledge documents.
    • Inquire into the value of the collateral and whether it is sufficient to cover the loan.

  3. Monitor the Loan

    • Maintain open communication with the principal borrower.
    • Ensure that payments are made promptly; co-makers can request statements of account to keep track of the loan status.

  4. Document Everything

    • Keep copies of all documents you sign.
    • If you end up paying the lender, document payments thoroughly so you can pursue reimbursement.

  5. Seek Legal Advice Early

    • If disputes arise or the principal borrower defaults, consult a lawyer right away to explore possible defenses or to negotiate a settlement.

9. Conclusion

In the Philippines, co-makers often find themselves facing significant liability when a principal borrower defaults, especially where the loan contract defines their obligation as “solidary.” Even in the presence of collateral, if the collateral is insufficient or a dispute arises regarding its validity, the lender will often turn to the co-maker to recover the loan amount or any deficiency.

Ultimately, a co-maker should approach the arrangement with caution, fully understanding the legal implications of signing a loan agreement. Both lenders and borrowers should ensure clarity in contractual language, specifying whether liability is joint or solidary and any limitations that may apply. In all cases, awareness of one’s rights and obligations—as well as prompt legal consultation when disputes or uncertainties arise—can mitigate potential losses and safeguard interests on all sides.

References (Philippine Laws and Jurisprudence)

  1. Civil Code of the Philippines (Republic Act No. 386), particularly:
    • Articles 1156 to 1304 (Obligations and Contracts)
    • Articles 1207 to 1222 (Joint and Solidary Obligations)
    • Articles 2047 to 2084 (Guarantee and Suretyship)
  2. Relevant Bangko Sentral ng Pilipinas (BSP) Circulars on consumer protection and loan documentation.
  3. Select Supreme Court Decisions elucidating the nature of co-maker liability, particularly where courts have treated a co-maker as a surety based on the loan contract’s “joint and several” stipulations.

Disclaimer: This article is not intended as legal advice. For specific concerns, always seek the counsel of a qualified attorney who can provide guidance tailored to the facts of your case and the latest legal developments.

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

Privacy Policy

Terms of Use

Lawyer Login

 
 
Privacy Policy         Terms of Use         Lawyer Login