CREDIT TRANSACTIONS

- All transactions involving the purchase or loan of goods,

services, or money in the present with a promise to pay or
deliver in the future
LOAN (Articles 1933 1961)
A contract wherein one of the parties delivers to another, either
something not consumable so that the latter may use the same
for a certain time and return it or money or other consumable
thing, upon the condition that the same amount of the same kind
and quality shall be paid. (Art 1933)
Kinds:
Commodatum when the bailor (lender) delivers to the bailee
(borrower) a non-consumable thing so that the latter may use it
for a certain time and return the identical thing.
Simple loan or mutuum where the lender delivers to the
borrower money or other consumable thing upon the condition
that the latter shall pay the same amount of the same kind and
quality.
GUARANTY (Articles 2047 2084)
A contract whereby a person (guarantor) binds himself to the
creditor to fulfil the obligation of the principal debtor in case the
latter fail to do so.
SURETYSHIP
A contract whereby a person (surety) binds himself solidarily with
the principal debtor
Guaranty

Suretyship

1. Liability depends upon

an independent agreement
to pay the obligation if
primary debtor fails to do
so

1. Surety assumes liability

as regular party to the
undertaking

2. Collateral under-taking

2. Surety is an original
promisor

3. Guarantor is secondarily
liable

3.
Surety is primarily
liable

1. Guarantor
binds
himself to pay if the
principal CANNOT PAY

4. Surety undertakes to
pay if the principal DOES
NOT PAY

5. Insurer of solvency of
debtor

5. Insurer of the debt

6. Guarantor can avail of

the benefit of excussion
and division in case
creditor proceeds against
him

6. Surety cannot avail of

the benefit of excussion
and division

Double or sub-guaranty (Art 2051 2nd par)

One constituted to guarantee the obligation of a guarantor
Continuing guaranty (Art 2053)
One which is not limited to a single transaction but which
contemplates a future course of dealings, covering a series of
transactions generally for an indefinite time or until revoked.
Benefit of Excussion (Art 2058)
The right by which the guarantor cannot be compelled to pay the
creditor unless the latter has exhausted all the properties of the
principal debtor, and has resorted to all of the legal remedies against
such debtor
When Guarantor is not entitled to the benefit of excussion:
(PAIRS)
1. If it may be presumed that an execution on the property of the
principal debtor would not result in the satisfaction of the
obligation
Not necessary that the debtor be judicially declared
insolvent or bankrupt
2. When he has absconded, or cannot be sued within the
Philippines unless he has left a manager or representative
3. In case of insolvency of the debtor
Must be actual
4. If the guarantor has expressly renounced it
5. If he has bound himself solidarily with the debtor
Other grounds: (BIPS)
6. If he is a judicial bondsman or sub-surety
7. If he fails to interpose it as a defense before judgment is
rendered against him
8. If the guarantor does not set up the benefit against the creditor
upon the latters demand for payment from him, and point out to
the creditor available property to the debtor within Philippine
territory, sufficient to cover the amount of the debt (Art 2060)
Demand can be made only after judgment on the debt
Demand must be actual; joining the guarantor in the suit
against the principal debtor is not the demand intended by
law
9. Where the pledge or mortgage has been given by him as special
security
Art. 2060. In order that the guarantor may make use of the benefit of
exclusion, he must set it up against the creditor upon the latter's
demand for payment from him, and point out to the creditor available
property of the debtor within Philippine territory, sufficient to cover the
amount of the debt.

Steps in Setting up as a Defense the Benefit of Excussion

1.

Debtor defaulted

2.

There is demand from the Creditor

3.

By pointing out to the creditor available property of the debtor

4.

Property must be within the Philippine territory

5.

sufficient to cover the amount of the debt

Benefit of Division (Art 2065)

Should there be several guarantors of only one debtor and for the

same debt, the obligation to answer for the same is divided

among all.
Liability: Joint

1.
2.

Right of Guarantor to proceed against debtor before payment

GENERAL RULE: Guarantor has no cause of action against debtor

3.

until after the former has paid the obligation

EXCEPTION: Art. 2071. The guarantor, even before having paid,

may proceed against the principal debtor:
(1) When he is sued for the payment;
(2) In case of insolvency of the principal debtor;
(3) When the debtor has bound himself to relieve him from
the guaranty within a specified period, and this period has
expired;
(4) When the debt has become demandable, by reason of
the expiration of the period for payment;
(5) After the lapse of ten years, when the principal obligation
has no fixed period for its maturity, unless it be of such
nature that it cannot be extinguished except within a period
longer than ten years;
(6) If there are reasonable grounds to fear that the principal
debtor intends to abscond;
(7) If the principal debtor is in imminent danger of becoming
insolvent.
In all these cases, the action of the guarantor is to obtain release from
the guaranty, or to demand a security that shall protect him from any
proceedings by the creditor and from the danger of insolvency of the
debtor
Extinguishment of guaranty: (RA2CE2)
1. Release in favor of one of the guarantors, without the consent of
the others, benefits all to the extent of the share of the guarantor
to whom it has been granted (Art 2078);
2. If the creditor voluntarily accepts immovable or other properties in
payment of the debt, even if he should afterwards lose the same
through eviction or conveyance of property (Art 2077);
3. Whenever by some act of the creditor, the guarantors even
though they are solidarily liable cannot be subrogated to the
rights, mortgages and preferences of the former (Art 2080);
4. For the same causes as all other obligations (Art 1231);
5. When the principal obligation is extinguished;
6. Extension granted to the debtor by the creditor without the
consent of the guarantor (Art 2079)

Secures the fulfillment of a principal obligation;

Pledgor, mortgagor, antichretic debtor must be the absolute
owner of the thing pledged or mortgaged; and
The reason being that in anticipation of a possible
foreclosure sale in case of default which is still a sale, the
rule is that the seller must be the owner of the thing sold
(Cavite Development Bank vs. Lim, 324 SCRA 346)
Pledgor, mortgagor, antichretic debtor must have free disposal of
their property, or be legally authorized for such purpose.

Pactum Commissorium
Stipulation whereby the thing pledged or mortgaged, or under
antichresis shall automatically become the property of the creditor
in the event of non-payment of the debt within the term fixed.
Requisites:
1. There should be a pledge, mortgage, or antichresis of property by
way of security for the payment of the principal obligation; and
2. There should be a stipulation for an automatic appropriation by
the creditor of the property in event of nonpayment of the
obligation within the stipulated period.

GENERAL RULE: Pactum Commissorium is forbidden by law and is

declared null and void.
EXCEPTION: The pledgee may appropriate the thing pledged if
after the first and second auctions, the thing is not sold. (Art 2112)
PLEDGE (Arts 2093 2123)
A contract wherein the debtor delivers to the creditor or to a third
person a movable or document evidencing incorporeal rights for
the purpose of securing fulfilment of a principal obligation with the
understanding that when the obligation is fulfilled, the thing
delivered shall be returned with all its fruits and accessions.
Special Requisites (in addition to the common essential
requisites):
1.
2.

3.

Possession of the thing pledged must be transferred to the

creditor or a third person by agreement (Art 2093);
It can only cover movable property and incorporeal rights
evidenced by documents of title and the instruments proving the
right pledged shall be delivered to the creditor, and if negotiable
must be endorsed (Art 2094); and
The description of the thing pledged and the date must appear in
a public instrument to bind third persons, but not for the validity of
the contract (Art 2096).

Requirements for sale of thing pledged at public auction: (Art

2112)
1. The debt is due and unpaid
2. Sale must be at a public auction
3. there must be notice to the pledgor and owner, stating the
amount due
4. Sale must be with the intervention of a notary public
REAL ESTATE MORTGAGE (Articles 2124-2131)

PLEDGE, MORTGAGE AND ANTICHRESIS

I. Common Elements of Pledge, Mortgage, and Antichresis
(Articles 2085 2092)
A. Essential Requisites (SOD) (Art 2085)

A contract whereby the debtor secures to the creditor the

fulfilment of a principal obligation, specially subjecting to such
security immovable property or real rights over immovable
property in case the principal obligation is not complied with at
the time stipulated.

PLEDGE
1. Constituted on
movables
2. Property is delivered to
pledgee or by common
consent to a third person
3. Not valid against third
persons unless a
description of the thing
pledged and date of
pledge appear in a public
instrument

REAL MORTGAGE
1. Constituted on
immovables
2. Delivery is not
necessary
3. Not valid against third
persons unless registered

Foreclosure
The remedy available to the mortgagee by which he subjects the
mortgaged property to the satisfaction of the obligation to secure
that for which the mortgage was given
Judicial foreclosure
Extrajudicial
foreclosure
1. There is court
intervention
2. Decisions are
appealable
3. Order of court cuts
off all rights of the
parties impleaded
4. There is equity of
redemption except on
banks which provides for
a right of redemption
5. Period of redemption
starts from the finality of
the judgment until order
of confirmation
6. No need for a special
power of attorney in the
contract of mortgage

1.

No court intervention

2. Not appealable
because it is
immediately executory
3. Foreclosure does not
cut off right of all parties
involved
4. There is right of
redemption
5. Period to redeem
start from date of
registration of certificate
of sale
6. Special power of
attorney in favor of
mortgagee is needed in
the contract

Should there remain a balance due to the mortgagee after

applying the proceeds of the sale, the mortgagee is entitled to

recover the deficiency. This rule applies both to judicial and
extra-judicial foreclosure real mortgage.
The action to recover a deficiency after foreclosure prescribes
after 10 years from the time the right of action accrues (Arts 1142
& 1144).

Redemption
It is the transaction by which the mortgagor reacquires or buys
back the property which may have passed under the mortgage,
or divests the property of the lien which the mortgage may have
created.
Kinds:
1. Equity of Redemption right of mortgagor to redeem the
mortgaged property after his default in the performance of the
conditions of the mortgage within the 90-day period from the date
of the service of the order of foreclosure or even thereafter but
before the confirmation of the sale. Applies to judicial foreclosure
of real mortgage and chattel mortgage foreclosure.
2. Right of Redemption right of mortgagor to redeem the
mortgaged property within one year from the date of registration
of the certificate of sale. Applies only to extrajudicial foreclosure
of real mortgage.
NOTE: The right of redemption, as long as within the period
prescribed, may be exercised irrespective of whether or not the

mortgagee has subsequently conveyed the property to some other

party (Sta. Ignacia Rural Bank, Inc. vs. CA, 230 SCRA 513)
Period of Redemption
1. Extra-judicial (Act #3135)
a. natural person one year from registration of the certificate
of sale with Registry of Deeds
b. juridical person same rule as natural person
c. juridical person (mortgagee is bank) - three months after
foreclosure or before registration of certificate of foreclosure
whichever is earlier (sec. 47, of General Banking Law)
2.

Judicial before confirmation of the sale by the court

NOTE: Allowing redemption after the lapse of the statutory period,

when the buyer at the foreclosure sale does not object but even
consents to the redemption, will uphold the policy of the law which is
to aid rather than defeat the right of redemption. There is nothing in
the law which prevents a waiver of the statutory period for redemption
(Ramirez vs CA, 219 SCRA 598).
ANTICHRESIS (Articles 2132 -2139)
A contract whereby the creditor acquires the right to receive the
fruits of an immovable of the debtor, with the obligation to apply
them to the payment of the interest, if owing, and thereafter to the
principal of his credit (Art 2132)
NOTE: The obligation to pay interest is not of the essence of the
contract of antichresis, there being nothing in the Code to show
that antichresis is only applicable to securing the payment of
interest-bearing loans. On the contrary, antichresis is susceptible
of guaranteeing all kinds of obligations, pure or conditional
Antichresis
1. Refers to real property

Pledge

2. Perfected by mere
consent
3. Consensual contract

1. Refers to personal
property
2. Perfected by delivery of
the thing pledged
3. Real Contract

Antichresis

Real Mortgage

1. Property is delivered to
1. Debtor usually retains
creditor
possession of the property
2. Creditor acquires only
2. Creditor does not have
the right to receive the
any right to receive the
fruits of the property,
fruits; but the mortgage
hence, it does not produce creates a real right over
a real right
the property
3. The creditor, unless
3. The creditor has no
there is stipulation to the
such obligation
contrary, is obliged to pay
the taxes and charges
upon the estate
4. It is expressly stipulated 4. There is no such
that the creditor given
obligation on part of
possession of the property mortgagee
shall apply all the fruits
thereof to the payment of
interest, if owing, and
thereafter to the principal
Subject matter of both is real property

Obligations of antichretic creditor:

2
3
4

To pay taxes and charges on the estate, including necessary

expenses
NOTE: Creditor may avoid said obligation by:
a. compelling debtor to reacquire enjoyment of the
property or
b. by stipulation to the contrary
To apply all the fruits, after receiving them, to the payment of
interest, if owing, and thereafter to the principal
To render an account of the fruits to the debtor
To bear the expenses necessary for its preservation and repair

Remedies of creditor in case of non-payment of debt

1.
2.

Bring an action for specific performance; or

Petition for the sale of the real property as in a foreclosure of
mortgages under Rule 68 of the Rules of Court.(Art 2137)

NOTES:
The parties, however, may agree on an extrajudicial foreclosure
in the same manner as they are allowed in contracts of mortgage
and pledge (Tavera vs. El Hogar Filipino, Inc., 68 Phil 712).
A stipulation authorizing the antichretic creditor to appropriate the
property upon the non-payment of the debt within the agreed
period is void (Art 2088).
CHATTEL MORTGAGE (Articles 2140-2141)
A contract by virtue of which personal property is recorded in the
Chattel Mortgage Register as a security for the performance of an
obligation (Art 2140).
Characteristics
1. Accessory contract it is for the purpose of securing the
performance of a principal obligation
2. Formal contract registration in the Chattel Mortgage Register is
indispensable for its validity
3. Unilateral contract it produces only obligations on the part of the
creditor to free the thing from the encumbrance on fulfilment of
the obligation.
Special Requisites (in addition to the common essential
requisites):
1. It can cover only personal or movable property in general;
however, the parties may treat as personal property that which by
its nature would be real property;
2. Registration of the mortgage with the Chattel Mortgage Register
where the mortgagor resides; if property is located in a different
province, registration in both provinces required;
3. Description of the property as would enable the parties or other
persons to identify the same after reasonable investigation and
inquiry; and
4. Accompanied by an affidavit of good faith to bind third persons,
but not for the validity of the contract.
5. It can cover only obligations existing at the time the mortgage is
constituted.
NOTE: A mortgage containing a stipulation in regard to future
advances in the credit will take effect only from the date the same are
made and not from the date of the mortgage (Jaca vs Davao Lumber
Co., 113 SCRA 107
Effect of failure to register chattel mortgage in the chattel
mortgage registry

Article 2140 makes the recording in the Chattel Mortgage

Register an essential requisite but if the instrument is not
recorded, the mortgage is nevertheless binding between the
parties. But the person in whose favour the law establishes a
mortgage has no other right than to demand the execution and
the recording of the document.
Chattel Mortgage
1. Delivery of the
personal property to the
mortgage is not
necessary
2. registration in the
Chattel Mortgage
Registry is necessary
for its validity
3. If property is
foreclosed, the excess
over the amount due
goes to the debtor

Pledge
1. Delivery of the thing
pledged is necessary
2. registration not
necessary to be valid
3. Debtor is not entitled
to excess unless
otherwise agreed or
except in case of legal
pledge
4. If there is deficiency,
creditor is not entitled to
recover notwithstanding
any stipulation to the
contrary

4. If there is deficiency
after foreclosure,
creditor is entitled to
recover the deficiency
from the debtor, except
under Art. 1484
Subject matter of both is movable property

Affidavit of Good Faith

Oath in a contract of chattel mortgage wherein the parties
"severally swear that the mortgage is made for the purpose of
securing the obligation specified in the conditions thereof and for
no other purposes and that the same is a just and valid obligation
and one not entered into for the purpose of fraud. (Sec. 5,
Chattel Mortgage Law)
Effect of absence
The special affidavit is required only for the purpose of
transforming an already valid mortgage into preferred mortgage.
Thus, it is not necessary for the validity of the chattel mortgage
itself but only to give it a preferred status. In other words, its
absence vitiates the mortgage only as against third persons
without notice like creditors and subsequent encumbrancers.
Foreclosure of Chattel Mortgage
NOTES:
Foreclosure sale in chattel mortgage is by public auction under
Act No. 1508, but the parties may stipulate that it be by private
sale.
The mortgagee may, after thirty (30) days from the time of the
condition broken, cause the mortgaged property to be sold at
public auction by a public officer. The 30-day period is also a
grace period for the mortgagor to discharge the mortgage
obligation. After the sale of the chattel at public auction, the right
of redemption is no longer available to the mortgagor (Cabral vs.
Evangelista, 28 SCRA 1000).
Application of proceed of sale:
1. Costs and expenses of keeping and sale
2. Payment of the obligation secured by the mortgage

3.
4.

Claims of persons holding subsequent mortgages in their

order
The balance, if any, shall be paid to the mortgagor or person
holding under him

NOTES:
The creditor may maintain an action for the deficiency, except if
the chattel mortgage is constituted as security for the purchase of
personal property payable in instalments (Art. 1484).
The action for deficiency may be brought within ten (10) years
from the time the cause of action accrues (Arts 1141 and 1142).
Only equity of redemption is available to the mortgagor; the latter
can no longer redeem after the confirmation of the foreclosure
sale.
Right of redemption
When the condition of a chattel mortgage is broken the following
may redeem:
a) mortgagor;
b) person holding a subsequent mortgage; or
c) subsequent attaching creditor.
An attaching creditor who so redeems shall be subrogated to the
rights of the mortgagee and entitled to foreclose the mortgage in
the same manner that the mortgagee could foreclose it.
The redemption is made by paying or delivering to the mortgagee
the amount due on such mortgage and the costs, and expenses
incurred by such breach of condition before the sale thereof (Sec
13, Act No. 1508).
Right to possession of foreclosed property
1. Real mortgage After the redemption period has expired, the
purchaser of the property has the right to a conveyance and to be
placed in possession thereof.
NOTES:
Purchaser is not obliged to bring a separate suit for
possession. He must invoke the aid of the courts and ask for
a WRIT OF POSSESSION.
Section 7 of Act No. 3135 allows the purchaser to take
possession of the foreclosed property during the period of
redemption upon filing of an ex parte application and
approval of a bond.
2.

Chattel mortgage When default occurs and the creditor desires

to foreclose, the creditor has the right to take the property as a
preliminary step for its sale.
NOTE: Where the debtor refuses to yield the property, the
creditors remedy is to institute an action either to effect judicial
foreclosure directly or to secure possession (REPLEVIN) as a
preliminary to the sale contemplated in Section 14 or Act. No.
1508