Dear Attorney,

Good day.

I am writing to seek legal advice regarding a financial concern involving my mother's unpaid loan. In 2020, she borrowed ₱65,000, agreeing to repay it over 18 months at a 3.5% interest rate with a weekly amortization of ₱1,471.53. She made partial payments until 2021, but after suffering a stroke, she was unable to continue. Due to her medical condition, which has affected her memory and cognitive functions, she could not fully disclose the details of this loan to our family.

From 2021 to December 2024, the lending company did not provide any notification or demand for payment. However, a collection agency recently contacted us, presenting a settlement demand. Upon review of the statement of account, it appears that interest and penalties have accrued significantly, inflating the amount owed to ₱178,000, which they now ask to be paid in monthly installments over 36 months.

Given my mother's medical history and the lack of prior notice from the lender about the unpaid loan, I am seeking advice on whether it is possible to waive the interest and penalties and instead settle the debt by paying only the principal amount of ₱65,000. Alternatively, can we request a reduction of the settlement balance? Your assistance in this matter would be greatly appreciated.

Sincerely,
A Concerned Family Member

Legal Considerations on Unpaid Loans, Interest, and Penalties in the Philippines

This situation raises several legal issues under Philippine law, including the enforceability of loan agreements, interest and penalty accrual, the lender’s obligation to notify borrowers, and the impact of medical incapacity on loan obligations. Below is an analysis of these concerns.

1. Nature of Loan Agreements

Loan agreements are governed by the Civil Code of the Philippines, specifically Articles 1953 to 1992. A valid loan agreement requires mutual consent, a valid object (money or equivalent), and a lawful purpose. Once the loan is granted, the borrower is obligated to repay the amount with interest as stipulated in the contract.

If the lending company and your mother entered into a written loan agreement, its terms are binding unless declared void or modified by mutual agreement. However, certain provisions, such as excessive interest rates or penalties, may be deemed unconscionable under Philippine law.

2. Excessive Interest and Penalty Charges

Under Article 1229 of the Civil Code, courts have the authority to reduce penalties if they are excessive or unconscionable. The Supreme Court has repeatedly ruled that an interest rate exceeding 12% per annum may be considered excessive and subject to reduction. For penalties, rates beyond 1% per month or 12% per annum are often deemed unreasonable.

In this case, the accrued penalties and interest from 2021 to 2024 resulted in a ballooning settlement amount of ₱178,000. The original principal loan of ₱65,000, payable over 18 months, would have involved manageable interest payments under the agreed 3.5% rate. However, the substantial increase due to penalties appears disproportionate and may warrant reduction under the principle of equity.

3. Lender’s Duty to Notify Borrowers

The absence of communication from the lending company from 2021 to 2024 raises questions about the lender’s diligence and adherence to fair debt collection practices. Republic Act No. 3765, or the Truth in Lending Act, requires lenders to fully disclose loan terms and conditions, including any changes or demands for repayment.

The lack of notices or follow-ups from the lender for a prolonged period may undermine their claim to the full penalties and interest. If they failed to notify your mother promptly, they could be held partially accountable for the significant accrual of penalties.

4. Impact of Medical Incapacity on Loan Obligations

Your mother’s medical condition, particularly her stroke in 2021, may affect her ability to fulfill the loan obligations. While a loan is not automatically extinguished by illness, her condition could be a mitigating factor in renegotiating the terms of repayment.

Courts may consider her incapacity as a compelling reason to reduce penalties and interest. Article 2208 of the Civil Code allows courts to grant equitable relief in cases of undue hardship, particularly when the debtor’s condition is beyond their control.

5. Consumer Protection in Debt Collection

Republic Act No. 11765, or the Financial Products and Services Consumer Protection Act, establishes protections against abusive collection practices. Collection agencies are required to act with transparency and fairness. Demanding excessive penalties or employing coercive tactics may violate this law.

Should the collection agency’s demands be unreasonable, you may file a complaint with the Bangko Sentral ng Pilipinas (BSP) or the Securities and Exchange Commission (SEC), depending on the lender’s regulatory body.

Legal Options Available to You

Request for Waiver of Interest and Penalties
- You may formally request the lender to waive or reduce the accrued interest and penalties. Cite your mother’s medical history, the lack of prior notification, and the excessive nature of the penalties as grounds for leniency.
Negotiate a Settlement
- Propose to settle the loan by paying the principal amount (₱65,000) or a reduced settlement figure. Emphasize the mitigating circumstances and your willingness to resolve the debt amicably.
File a Complaint
- If negotiations fail, you may consider filing a complaint with the BSP or SEC for unfair collection practices and excessive charges.
Seek Judicial Relief
- As a last resort, you may file a case in court to challenge the penalties and seek a judicial reduction under Article 1229 of the Civil Code. Highlight the unconscionable nature of the penalties and the lender’s failure to notify.

Practical Steps to Take

Document Everything
- Keep copies of the loan agreement, medical records, and correspondence with the lender or collection agency. These documents will be crucial in negotiations or legal proceedings.
Consult a Lawyer
- Engage a lawyer to review the loan agreement and assist in drafting a formal request or complaint.
File a Formal Request
- Send a written request to the lender for a waiver or reduction of penalties, supported by evidence of your mother’s medical condition.
Escalate if Necessary
- If the lender refuses to negotiate, escalate the matter to regulatory authorities or pursue legal action.

Conclusion

Under Philippine law, you have the right to challenge excessive interest and penalties, particularly when mitigating factors such as medical incapacity and the lender’s failure to notify are present. Begin by negotiating with the lender or collection agency, and if needed, seek legal recourse to protect your family’s interests.