Letter to a Lawyer:

Dear Attorney,

I hope this letter finds you well. I am reaching out to seek legal guidance on an issue that has raised significant concern. Suppose a borrower takes out a loan but fails to fulfill their obligation to repay it. Instead of the borrower being held accountable, the co-maker is immediately pursued by the lender. Is this legally permissible? Does the lender have the right to demand payment from the co-maker while the borrower is still available and capable of paying?

I am concerned about the fairness of such arrangements and would appreciate your legal insight into whether this practice aligns with Philippine law.

Thank you for your time and assistance.

Sincerely,
A Concerned Citizen

Legal Analysis: Rights and Liabilities of Co-Makers Under Philippine Law

In the Philippine legal system, the concept of a co-maker in financial obligations is governed by provisions under the Civil Code of the Philippines, relevant jurisprudence, and applicable regulations by the Bangko Sentral ng Pilipinas (BSP). A co-maker's legal standing, rights, and liabilities depend on the specific terms of the loan agreement and the principles governing solidary obligations, guaranty, and suretyship.

Understanding the Role of a Co-Maker

A co-maker is an individual who signs a loan agreement alongside the borrower, effectively assuring the lender that the debt will be paid. By signing, the co-maker is bound by the terms of the contract.

Nature of Obligations:

Solidary Obligations: If the loan agreement explicitly states that the co-maker is jointly and severally liable with the borrower, the co-maker’s liability becomes solidary. This means the lender can choose to demand payment from either the borrower or the co-maker without exhausting remedies against one first.
Guaranty or Suretyship: In cases where the co-maker is only a guarantor or surety, the lender must generally proceed against the borrower first unless the loan agreement specifies otherwise.

Legal Basis for Demanding Payment

Under Philippine law, the lender’s right to collect from the co-maker arises from the nature of the co-maker’s obligation as stipulated in the contract:

Article 1207 of the Civil Code: Solidary liability must be expressly stated in the contract. Without this, the obligation is presumed to be joint, and the co-maker is not immediately liable for the entire debt.
Article 2047 of the Civil Code: A guaranty is not presumed; it must be expressly stated. If the co-maker acts as a guarantor, they are liable only if the borrower fails to pay.
Article 2062 of the Civil Code: A guarantor can demand that the lender exhausts all legal remedies against the borrower before enforcing liability against them. This principle is known as the benefit of excussion.

Is It Legal to Pursue the Co-Maker First?

If the co-maker signed a solidary obligation, the lender can immediately demand payment from the co-maker without pursuing the borrower. This principle is well-established in jurisprudence, including:

G.R. No. 160759, Equitable PCI Bank v. OJ-Mark Trading, Inc. (2007): The Supreme Court affirmed that in a solidary obligation, the creditor may choose from whom to collect, regardless of the borrower's availability or willingness to pay.

If the co-maker acts merely as a guarantor or surety, the lender must comply with the rules on excussion, unless waived by the co-maker.

Remedies Available to the Co-Maker

If the co-maker pays the debt, they are entitled to recover the amount from the principal borrower. This is based on the principle of subrogation under Article 2066 of the Civil Code.

Steps the co-maker can take include:

Demanding Reimbursement: After payment, the co-maker can legally demand the borrower to reimburse the amount paid.
Filing a Civil Case: If the borrower refuses to repay, the co-maker can file a case for reimbursement or indemnity.
Defenses Against the Lender:
- If the co-maker was coerced or misled into signing the agreement, they may challenge the validity of their obligation.
- Lack of consent or knowledge of the loan's terms may also be a ground for contesting liability.

Fairness and Public Policy Considerations

While the law protects lenders’ rights, the practice of pursuing co-makers has raised concerns about fairness. Often, co-makers are unaware of the full extent of their liabilities, leading to situations where they bear the burden of repayment despite the borrower's availability.

To address these concerns, the BSP and consumer protection laws emphasize:

Transparency in Loan Agreements: Lenders are required to ensure that borrowers and co-makers fully understand the terms of their obligations.
Ethical Collection Practices: The Financial Consumer Protection Act (Republic Act No. 11765) prohibits unfair debt collection practices, including harassment of co-makers.

Practical Advice for Co-Makers

Review the Loan Agreement Carefully: Understand the nature of your obligation—whether solidary or as a guarantor.
Seek Legal Counsel Before Signing: If unsure about the terms, consult a lawyer to clarify potential liabilities.
Negotiate Terms with the Borrower: Ensure the borrower understands their primary obligation and includes safeguards for repayment.

Conclusion

To summarize, it is legal for a lender to pursue the co-maker for repayment if the agreement specifies a solidary obligation. However, if the co-maker acts merely as a guarantor or surety, the lender must exhaust remedies against the borrower first. Co-makers should be vigilant and fully informed before signing loan agreements to avoid unintended liabilities.

The law provides remedies for co-makers, including reimbursement rights and legal defenses against unfair practices. Proper awareness and legal guidance are key to navigating these financial arrangements responsibly.