Letter to a Lawyer

Dear Attorney,

I am writing to seek your advice regarding a cooperative loan issue I am currently facing. The loan was originally granted for an amount which has now increased to PHP 190,000 due to accrued interest, penalties, attorney’s fees, and other charges.

Initially, there was a verbal agreement for me to pay PHP 5,000 monthly for nine months, and any remaining balance would be settled in full on the 10th month. Unfortunately, I was unable to fulfill the agreement completely due to financial constraints, as my spouse does not have a stable income. Despite informing the cooperative of my situation and pledging that I would do my best, they declined to renegotiate the terms.

I managed to pay the first installment of PHP 5,000 in July, but due to my financial status, I could not maintain consistent payments. However, I have been making partial payments whenever possible.

Given these circumstances, I am concerned about the potential legal actions the cooperative may pursue against me, considering the matter has already reached the courts. I would like to understand my options and what I can expect moving forward.

Sincerely,
A Concerned Borrower

Legal Guide on Cooperative Loans and Default Under Philippine Law

1. Understanding the Loan Agreement

In the Philippines, loan agreements with cooperatives are subject to the Cooperative Development Authority (CDA) regulations, the Cooperative Code (Republic Act No. 9520), and general civil laws under the Civil Code.

Verbal Agreements and Their Validity

A verbal loan agreement, while generally binding, is harder to enforce in court due to the lack of documentary evidence. In your case, the cooperative might rely on other records (e.g., acknowledgment receipts, account ledgers) to prove the terms of the agreement.
Under Article 1956 of the Civil Code, loans must be in writing to enforce interest rates. If the agreement to impose interest is not documented, the cooperative may only collect the principal loan amount.

2. Consequences of Loan Default

When a borrower defaults, cooperatives may pursue legal remedies to recover the loan, which may include:

a. Filing a Case in Court

If the cooperative has already filed a case against you, the proceedings would typically involve:

Demand Letter: Before filing a case, the cooperative should have sent a formal demand letter requiring payment within a specified time.
Filing a Collection Case: The cooperative may sue you for breach of contract to recover the outstanding balance, including penalties and attorney’s fees.

b. Imposing Additional Charges

Cooperatives commonly impose penalties for delayed payments. However, the penalties and interest should not be excessive, as this may be considered usurious or oppressive.

c. Garnishment or Execution

If the court rules against you, the cooperative can request a writ of execution, allowing them to garnish your bank accounts, attach properties, or seize assets for auction.

3. Protections Under Philippine Law

As a borrower, you are entitled to certain protections, even in cases of default:

a. Fair and Reasonable Interest Rates

The Supreme Court has ruled in several cases that interest rates exceeding 12% per annum may be considered excessive and unconscionable. Penalties must also be reasonable under Article 1229 of the Civil Code.
If the interest and penalties charged by the cooperative are excessive, you may file a counterclaim or motion to reduce them.

b. Right to Be Heard

You have the right to defend yourself in court. If you did not receive proper notice of the case or were not given the opportunity to respond, you can file a motion to dismiss or vacate the judgment.

c. Protection Against Harassment

Under the Lending Company Regulation Act of 2007 (Republic Act No. 9474), creditors are prohibited from using abusive or unreasonable collection practices. If the cooperative harassed you during the collection process, you may file a complaint with the CDA or the courts.

4. Strategies for Resolving the Issue

a. Settlement or Renegotiation

Approach the cooperative and request a written restructuring agreement to pay in smaller installments. Emphasize your financial difficulties and good faith in paying partially.

b. Challenge Excessive Charges in Court

If the penalties and attorney’s fees are disproportionate, you may challenge these in court by citing jurisprudence on unconscionable fees.

c. Voluntary Compromise

Propose a compromise agreement to avoid further litigation costs. This could include waiving penalties or reducing interest if you pay a lump sum or adhere to a new payment plan.

5. Legal Assistance

It is crucial to engage a lawyer to assist you with:

Reviewing the loan agreement and court documents for irregularities.
Representing you in court or during negotiations.
Filing counterclaims, if necessary, to reduce penalties and charges.

6. Preventive Measures for Borrowers

To avoid similar issues in the future:

Ensure all agreements are in writing, including payment terms and interest rates.
Verify the cooperative’s compliance with CDA rules.
Seek financial advice before entering into loans that may become unmanageable.

Conclusion

Your situation highlights the importance of understanding your rights as a borrower and the responsibilities of cooperatives in loan agreements. While defaulting on a loan carries significant risks, Philippine law provides avenues for borrowers to seek redress, especially against excessive charges or unfair treatment.

Consulting a lawyer to review the specifics of your case is essential for crafting the best strategy moving forward. With proper legal guidance, you can negotiate a resolution that balances your financial capacity and the cooperative’s need to recover its loan.