Dear Attorney,

Good day.

I am seeking legal assistance regarding my mother's unpaid loan. She availed of a loan amounting to PHP 65,000 in 2020, which was payable within 18 months at an interest rate of 3.5% per month, with a weekly amortization of PHP 1,471.53. Although my mother initially made payments, she was unable to complete them by 2021 due to a stroke that significantly impaired her mental faculties.

Our family was unaware of this loan until late 2024, when a collection agency arrived at our residence demanding payments. We requested a Statement of Account and found that the interest and penalties accrued from 2021 to 2024 amounted to an astounding PHP 4,000,000, with a settlement balance of PHP 178,000 payable over 36 months.

Given the circumstances, I wish to understand whether we have legal grounds to:

Waive the accrued interest and penalties and settle only the principal amount of PHP 65,000.
Negotiate a reduction of the settlement balance based on my mother’s medical history and the lending company's failure to provide timely notifications.

Your guidance on this matter will be deeply appreciated. Thank you for your time and assistance.

Sincerely,
[Concerned Individual]

Legal Considerations Regarding Unpaid Loans, Accrued Interest, and Penalties

The situation raised involves a complex interplay of obligations under Philippine laws, particularly the Civil Code, Consumer Act, and regulations by the Bangko Sentral ng Pilipinas (BSP) for lending companies. Below is an in-depth discussion of the issues at hand.

1. Obligation to Pay the Principal Loan and Interest

Under Article 1159 of the Civil Code, obligations arising from contracts must be honored. Your mother’s loan contract is binding, provided it was validly executed and the terms were properly disclosed. This includes the obligation to pay interest if stipulated in the agreement.

However, there are limits to how interest and penalties can accrue:

Unconscionable or Iniquitous Interest Rates:
In Medel v. Court of Appeals (G.R. No. 131622, 1998), the Supreme Court ruled that interest rates that are unconscionable or grossly excessive can be reduced. The agreed interest rate of 3.5% per month (or 42% per annum) may be subject to reduction if deemed excessive, especially when compounded with penalties. The court in similar cases has exercised its equitable jurisdiction to moderate such amounts.

2. Lending Company’s Duty to Notify Borrowers

Lending companies are obligated to provide borrowers with regular updates regarding their loan status:

Disclosure Requirements:
Under the Truth in Lending Act (R.A. 3765), lenders must ensure transparency by disclosing key details such as the total amount due, interest rates, and penalties. The absence of regular notifications about unpaid loans from 2021 to 2024 could indicate non-compliance with these disclosure requirements.
Failure to Notify and Good Faith:
The lending company’s failure to notify your family may be considered a lapse in good faith. The principle of good faith in contractual obligations (Art. 19 of the Civil Code) underscores the need for both parties to act with honesty and fairness.

3. Medical Condition and Capacity to Contract

Your mother’s medical condition is a critical factor. A stroke that impairs cognitive function raises questions about her ability to manage her obligations:

Capacity to Contract:
If it can be proven that your mother’s condition significantly affected her ability to understand or manage the loan during the relevant period, this may be grounds for reconsideration of the accrued interest and penalties.
Humanitarian Considerations:
Courts may invoke equity in light of her medical condition and the financial burden imposed on your family. Equity is applied when the strict application of the law results in unjust outcomes.

4. Waiver or Reduction of Interest and Penalties

The possibility of waiving or reducing the accrued interest and penalties depends on several factors:

Negotiation with the Lending Company:
You can propose to settle the principal amount and a reasonable portion of the accrued interest. Highlight mitigating factors such as:
- Your mother’s medical condition.
- Lack of timely notifications by the lending company.
- The iniquitous nature of the accrued penalties.
Judicial Intervention:
If negotiations fail, you may seek judicial relief. Courts have the authority to reduce interest rates and penalties if they are found to be excessive under Article 1229 of the Civil Code, which allows for the judicial reduction of penalties when they are iniquitous or unconscionable.

5. Debt Collection Practices

The involvement of a collection agency raises questions about compliance with Fair Debt Collection Practices. Under BSP Circular No. 454, lending companies and their agents are prohibited from engaging in abusive or unethical collection practices, including:

Intimidation or harassment.
Misrepresentation of the amount due.

If the collection agency employed such tactics, you may file a complaint with the BSP or appropriate regulatory body.

Steps You Can Take

Request a Full Accounting:
Ask the lending company for a detailed computation of the principal, interest, and penalties.
Negotiate for Reduction:
Present evidence of your mother’s medical condition and argue for a waiver or significant reduction of the penalties and interest.
File a Complaint if Necessary:
If the lending company or collection agency violated your rights, consider filing a complaint with:
- The Bangko Sentral ng Pilipinas (BSP) for unfair lending practices.
- The Department of Trade and Industry (DTI) under the Consumer Act for deceptive or unfair acts.
Consider Legal Action:
If negotiations fail, you may file a case for the judicial reduction of the penalties and interest. This would require a detailed analysis of the loan contract and the circumstances of default.

6. Recommendations

Based on the information provided, you have strong grounds to request a reduction or waiver of the accrued interest and penalties. Focus on the following arguments:

The excessive and unconscionable nature of the accrued penalties.
The lending company’s failure to notify the borrower from 2021 to 2024.
Your mother’s medical condition, which impaired her capacity to fulfill the obligation.

In conclusion, consult a lawyer to formally represent your family in negotiations or court proceedings. The legal arguments, supported by evidence of your mother’s medical condition and the lending company’s lapses, will strengthen your case for equitable relief.