CREDIT AND COLLECTION

Group 4< ACCOUNT MANAGEMENT

Account Management
- Is the practice of providing customers with service, support and improvement opportunities to
increase their consumption of product or service and maximize retention, cross-sell and upsell
opportunities within the customer base.
What is an account management do?
- So an account management is post-sales role that focuses on nurturing client relationships. Account
manager have two primary objectives; retain clients business and grow those opportunities. They
accomplish these objectives by learning what their clients goals are and helping their clients achieve
them.
Aging of Account
-In accounting, the term aging is associated with the accounts receivable's of business.
-Aging of accounts help business understand which receivables need to be dealt with first.

An example of account receivable is;

* If a payment are net 15 days, then the date range in the left-most column should only be for the first
15 days. This drops 16-day old invoices into the second column, which highlights that they are now
overdue for payment.

-Once cash loans have been released or merchandise have been supplied, the accounts are endorsed
to the collection department. While it is this departments direct responsibility to monitor the health of these
accounts, the credit department must also continuously be apprised of the results of the collection efforts,
particularly as it relates to credit policies and how they were implemented.

-The most important, and perhaps the only, basis for judging the condition of an account its age. Where
age refers to its age in relation to the due date. Accounts are either current or past due.

-So and Aging report is accomplished at the end of each month. To reckon whether an account is current
or past due, the cut –off date or the report date is guide.

-Aging summary . Next, this DETAILED AGING OF ACCOUNTS is summarized in what we is called the
Aging Summary, which in terms of balances and number of accounts.
-So the higher ratio of the accounts that are current, the better is the over all health of the accounts. The
word overall is emphasized because in looking at the detailed aging (it is called detailed because it lists
all accounts individually), therefore are accounts that require immediate and special attention;

-So it said that the older an account gets, the more difficult it is to collect , said the other way also; the
lesser is the probability of recovering that account.
COLLECTION POLICIES AND PROCEDURES
Legal Basis; So the collection of a just debt is backed up by the coercive power of the law. The
right of a creditor to collect a just debt is provided in ( Article 2236 of the Philippines Civil Code,
viz;)

“ The debtor is liable, with all his properties , present and future, for the fulfilment of his
obligation” ( underscoring supplied)

The creation of an efficient collection machinery is a necessary and legal undertaking. It has
for its purpose preservation of the creditors resources so they can be deployed to the benefit of
everyone. It is necessary because the non-payment of debts, whether by choice or
circumstances, is unavoidable.
Here are the some causes of non-payment and this are the;
1. calamities; typhoons, earthquake, floods, fires.
2. Unrealistic payment schedule; mismatching of loans usage versus loan term.
3. Unproductive investment : lavish and unnecessary outlays for luxurious offices , buildings, contraptions,
luxury vehicles.
4. Unproductive expenditures; fiestas, baptismal parties.
5. Extended hospitalization without health insurance coverage.
6.Large educational outlays.
7. Death of family provider without life insurance coverage.
8. Product defects.
9. Non-compliance with warranties
10. Constant breakdown and inefficient repair service.

PART II
GENERAL COLLECTION POLICIES

One of the primary factors that should be considered in the formulation of general collection
policies is the need for immediate recovery of the credit granted. In the appliance industry, the
interest rate is an affective 50% to 70% per year. It is so, by design, because of;

a.) the high costs of collection: motorized field collectors.

b.) higher “bad debts” risk.

Instalment payments must be collected on time so they can be used to purchase new
merchandise that will be sold for more profits. Slow collection will force an appliance company, or
any other supplier of credit, to borrow heavily or more frequently, reducing its financing or
financing or overall income.

Some of the areas where general collection policies have to be formulated;

1. Hiring of collectors:
a) job requirements.
b) protection against loss of cash collections thru selective hiring and surety
undertakings.
c) customer orientation-a precautionary measure.
2. Procedures in the handling of collections
a) collection
b) other collection techniques.

3. Surcharges and penalties.

4. Field motorized collection versus collection
5. When to send motorized collector\ collection letters.
6. Collection Incentive program
7. Insurance Policy to be assigned by debtor
8. Using service charges
9. Use of “acceleration clause”

Hiring policies for collectors

- In appliance companies and other small and medium-sized suppliers of credit, the job of a
collector is almost always a dead-end job. Upward mobility or the chances for career
advancement is very tight, especially in small enterprises where the owners nominate their own
family members for managerial positions.

-The hiring of high achievers(summa cum laudes, graduates of top-notch colleges and
universities) as collector in this type of company is definitely not good idea. In where such high
achievers, once you are hired, you will end up de-motivated and under-performing in just a year or
less.
Two(2) reasons of a very serious disadvantage of a company;
1.The high cost of training replacement personnel;
2.The accounts left by the resigned employee will be temporarily neglected and might deteriorate.

DEFALCATION
-It refers to an act committed by professionals who are in charge of handling money or other resource.
This typically entails the theft, misuse, or misappropriation of money or funds held by an official trustee, or
other senior-level fiduciary.

Selective Hiring
- It is a process of recruiting and selecting the right people with suitable characteristics and people who
can fit well into the organizations culture.
-It is preferable to hire collectors who have strong attachments to the community where the branch or
district office is located.
Protection against loss of cash collections.
-In banks where the loans due are in large lump-sum amounts, borrowers take the time to go to the bank
and make their payment to the bank cashiers. The instalment customers are certainly willing to entrust
this small amount to an authorized collector who could issue an official company receipt.
-Thus, field collectors are continuously exposed to large amounts of cash in any regular day.

There is an ever-present and continuing temptation of abscond(depart with the money). This
unauthorized and illegal act of taking company's cash collection is called “DEFALCATION” in the
appliance industry.
-So to protect the company, it would be wise to require the newly-hired collector to put up a
“surety undertaking”. In where a surgery undertaking is a document to be signed by the parents,
preferably, or close relatives, who have stable jobs or enterprises.
- So the recommended amount of the surety undertaking should vary depending on the average
cash collections handled in several days.

CUSTOMER ORIENTATION AS A PRECAUTIONARY MEASURE.

- It is best to educate the instalment customer prior to the release of the merchandise. In where they
must be oriented on the mandatory use of company official receipts.

Handling of Cash Collection- field

-This refers to field collections. In where the company must require all collectors to remit all collections,
cash or checks, before a designated cut-off time every day.
For example:
*If the branch store closes at 6 PM, the cash collections must be deposited with the branch
cashier or manager on or before 5:45 PM.

-If there are accounts that require long hours of travel, collectors should be required to schedule
them in the early morning hours.
A regular CONFIRMATION of past due accounts should be conducted every and then. This could
be done by the collection supervisor.
- For customer who occasionally make payments at the office, their ledgers should be pulled
out for the customer to review and confirm.
- And for those customer who has telephones or cell phone number, the office cashier could
conduct a random confirmation.
-Medium -scale and large-scale suppliers of credit have internal and external auditors ,who also
confirm accounts receivables. So these are done, however, periodically(semi-annually or
annually).

*There are other collection techniques that compel installment customers to pay direct to the
company;

1.Monthly payment tickets, payment by current-dated checks.

2.Direct bank payments.
3.Salary deduction.
4.Posdated checks.
MONTHLY PAYMENT TICKETS
-This are issued to the installment customer, usually bound in a sub, similar to personal checks. So if
the terms is 24 months, there will be 24 tickets or coupons, plus an extra 3 or so, just in case. So every
ticket is preprinted with the customers NAME and ACCOUNT NUMBER, and with the 24 due date.

For Example:
If the first due date is March 20, 2004, the first ticket will have the preprinted due date of March
29,2004, the second ticket with April 29,2004, and so forth.
So the issuance of monthly ticket or coupons are appropriate for customer who use checks as
payment. So this system have several advantage and this are the following;

1.They remind the customer to pay

2.Conveniance
3.Safety
4.In the end, it cost less than field collection
5.By writing a check, and mailing it, he is “forced” to make good on the check.
-A service charge is a fee collected to pay for services related to the primary product or service
being purchased. The charge is usually added at the time of the transaction.
So the creditor company must decide whether it should use service fees or charges. So these fees
are the following;

1st. They are usually expressed in terms of percentage of the principal amount.
2nd They are justifiable as expenses for appraisal, investigation, collection, paperwork; and
3rd Many financial institutions use these service charges or fees to increase their yield on their
loans, without violating interest limits on certain types of loans.

-Loan interest limits (maximum) are imposed on loans that will later be rediscounted with the
Bangko Sentral. So by rediscounting, a bank could use the same promissory note signed by a
farmer borrower, as a collateral for fresh loan from Bangko Sentral.

For Example:
An agricultural loan has a limit of 24% interest per year, So if a rural bank increases its interest
rate to let says it has increases up to 30%, so that loan cannot be used as collateral for a
rediscounting loan with the Bangko Sentral.

- So to increase the rural banks yield or income on the loan, without the interest limit, one
popular alternative is an increase in the service fee charged, from the usual 3% to as much as 10%

For Example:
The yield on a P 100,000, agricultural loan, then the 24% are not yet deducted in advance, at 3%
service fee is:

Interest income = P 27,0005 = 27.84%

Net loan Proceeds P 100,000- P 3,000 effective

So by increasing the service fee to 10%, the yield goes up:

Interest Income = P 34,0006 = 37.77%

Net loan Proceeds P 100,000- P 10,000 effective

GROUP 5

Part I

Recovery of credit granted

 This chapter is primary about the remedies available ta a creditor in case of non-payment.
 Remedies in case of non-payment factors.
1.) The loan or credit transaction has been confused
2.) There was completed transfer of possession (by delivery) or both ownership and possession;
questions on goods in transmit will not be covered here.
3.) The seller has discharged with his obligation to deliver a determined thing, but the buyer
refuses to, or cannot pay.
4.) There are no product defects or violations of warranties on the part of the seller.

To facilitate the understanding of this chapter, it is important to classify credit.

1.) Simple loan or mutuum
a. Loans of tangible and consumable things
b. Cash loan
2.) Credit on consumer durables
3.) Credit on movables
4.) Credit on immovable

 CASH LOAN
- In a cash loan, the borrower obligation is to payback the loan in the same currency, and in the
same amount, unless otherwise provided.
  CREDIT FOR MERCANDISE
- In a cash loan, cash is given by the lender and he is to be paid back also in cash, in
merchandiser credit the supplier provides merchandise and the debtor pays him back in cash.
 CREDIT CONSUMER DURABLES
- A consumer durable loan is a credit is a credit finance option for the purchase of household
appliances, electronic good etc.
 CREDIT OR SALE OF MOVABLE

A sale or credit is revenue earned by a company when it sells and allows the buyer to pay at a later
date.

Factors for determining recovery efforts

1. Nature of the object of the credit (cash or merchandise)

2. If loan is secured or not;
3. If secured, nature of the property used as security (personal, movable, immovable, incorporeal
rights)
4. Nature of the documents used (mortgage, pledge, trust receipt);
5. Nature of the relationship between the buyer and seller;
6. Nature of the seller’s business;
7. Special circumstances attending the seller or credit transaction.

Part II
Friendly Recovery Efforts

An Enterprises, whether it is a bank, a retailer, or an appliance company, is in business in the

long term. It is a “going concern” and its perpetuation or long-term existence is a primary
objectives pf its owners.

Some Friendly Efforts at Recovery Are:

1. Term extension
2. Merchandise return or swap.
3. Condonation of penalties and surcharges
4. Restructuring
a) Simple restructuring
b) Document substitution
5. Deposit of durables and movables at the branch store.
6. Debtor substitution.
7. Dacion en pago
8. Addition of guarantor or surely
9. Securitization.

Term Extension
 Creditor simply gives or adds a few more days, or weeks, even a month, to the due date
of an account, it gives the debtors extra time to recognize his resources and make good
or his obligation.

Merchandise Return-swap
  This is advisable if the goods cannot be sold in the area where the debtor’s locality, or the
merchandise has become obsolete, or out of fashion. A swap arrangement is also good
options, the unsold, merchandise is retaken by the seller and new merchandise provided
to its costumer.

Condonation of penalties and surcharges.

 The seller or lender is willing to condone, or not to collect, all penalties and surcharges,
and perhaps part of the interest, also, in exchange for the full payment of the account.
 Even government entities, particular LGU’s, use this technique for the speedy collection
of property and local business taxes.

Restructuring
There are 2 ways:
a) Simple restructuring, where the terms are extended and the monthly payments
reduced to affordable levels
b) Document substitution

Novation or change in the credit agreement

 The ownership and possession of said merchandise is transferred to the buyer. This
particular applies to situations where the buyer has a history of selling the goods obtained
on credit for cash and not remitting foe a very long time.

Deposit of durables and movables at the branch office

 In situations where installment payments have remained unpaid for many months, it
would be practical to request the buyer to deposit the items purchased to be deposited at
the branch store, with the promise that surcharges and penalties will be suspended.

Debtor substitution
 The debtor is replaced by another debtor who has an establish credit reputation. This will
require new documentation which will extinguish the old obligation and create a new one.

Dacion en pago
 Roughly translated this means that a debtor who has a property securing the debt, sells
the property to the creditor to settle his debt. One advantage to the seller is that he is
able to obtain a price for his property that is very close to its market value.

Addition of guarantor or surety

 The objective here is the protection of the creditor’s asset, particularly the safety of the
principal.

Securitization
 The creditor simply and politely “request” the debtor to collateralize his debt, by putting up
real state or personal property as security.
 The advantages of the debtor are:
a) Discontinuation of collection pressure
b) The opportunity to have plenty of time to recognize his financial resources, and
c) The opportunity to keep his credit reputation intact.
 The advantage of the creditor are:
a) Protector of his asset, or safety of the principal with a collateral and,
b) There is a specific collection time frame and he may read just his own resources
accordingly.
PART III
Drastic recovery efforts

Type of credit Option for drastic recovery of credit

Cash loan, unsecured Court order to pay, Levy or Garnishment,

replevin

Merchandise credit, unsecured Court order to pay, Levy or Garnishment,

replevin

Consumer durables, installment Either sum of money or Cancellation of sale and

repossession

Movables, chattel mortgage Foreclosure, replevin

Trust receipt of Criminal prosecution

Real state sale on installment Cancellation of the sale

Loan secured by real state Foreclosure

Credit obtained thru deceit Criminal prosecution

Court order to pay, then Levy or Garnishment: The unpaid seller or creditor may ask the court
to order the debtor to pay.

A levy is an essential act by which the property is set apart for the satisfaction of the judgment
and taken into custody of the law (Delta Motors Corp. vs. VA, supra 211-212). There is another
type of levy which is called garnishment. Garnishment applies to the properties of the debtor
where third parties are involved;

Consumer durables- Article 1484 of the Civil Code States "in a contract of sale of personal
property, the price of which is payable in installments, the vendor(seller) may exercise any of the
following remedies;

First- Exact fulfillment of the obligation, should the vendee fail to pay two or more
installments. Second, cancel the sale, should the vendee(buyer) fail to pay 2 or more
installments.

Third, foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendor fail to pay 2 or more installments, in this case, he shall have no further action against the
purchaser to recovery any unpaid balance on the price.

Movables- Movable are covered by the same article, particularly paragraph 3 on foreclosure of
chattel mortgage. It must be noted that the same paragraph states. "The seller shall have no
further action against the installment buyer to recover any unpaid balance".
 Trust receipts: Because of the explicit provisions of PD 115, criminal prosecution is the best
remedy for non-payment.

Real estate sale on installments: This refer to the sale of subdivision lots, and similar real
estate properties. To protect real estate installment buyers, Republic Act. No 6552 provides that if
the buyer has paid at least 2 years of installments the buyer is entitled.

1. To pay without interest, the unpaid installments within the total grace period earn by him,
which is hereby fixed at the rate of one month of every one year of installment payment; provided
that this right shall be exercised by the buyers only once every 5 years of the life of the contract
and extensions, if any.

2. If the contract is cancelled the seller shall refund to the buyer 50% of the total payments
made, and after 5 years of installments, 5% a year there after, but not to exceed 90% of total
payments made.

In this case, the usual remedy for an unpaid seller is foreclosure.

There are 2 kinds of foreclosure
a.) Judicial foreclosure: This is foreclosure through the Regional Trial Court of any province or city
when the property is located.

b.) Extrajudicial foreclosure: This is possible if there is a provision in the mortgage contract giving
the mortgage (creditor)the power upon default (non-payment) to foreclose extra judicially. The
sale of the property that was mortgage could be made without a court order

Repossession
For consumer durables such as appliance technique is by possession of the installment
unit. This means that the sale has been cancelled. The document used for appliance installment
sales is the deed of conditional sale with reservation of title.

Replevin
This is resorted to when the buyer or debtor refuses to surrender the installment unit.
For Example, in a chattel mortgage, the possessor of a car refuses to surrender the car so it can
be sold to pay the debt.

Q&A

__________ 1.) The borrower obligation is to pay back the loan in the same currency, and in the same
amount, unless otherwise provided.

__________ 2.) cash is given by the lender and he is to be paid back also in cash, in merchandiser credit
the supplier provides merchandise and the debtor pays him back in cash.

__________ 3.) A consumer durable loan is a credit is a credit finance option for the purchase of
household appliances, electronic good etc.
__________ 4.) A sale or credit is revenue earned by a company when it sells and allows the buyer to pay
at a later date.

__________ 5.) This is advisable if the goods cannot be sold in the area where the debtor’s locality, or the
merchandise has become obsolete, or out of fashion. A swap arrangement is also good options, the
unsold, merchandise is retaken by the seller and new merchandise provided to its costumer.

__________ 6.) The debtor is replaced by another debtor who has an establish credit reputation. This will
require new documentation which will extinguish the old obligation and create a new one.

PART II (GIVE AT LEAST 7 DRASTIC RECOVERY EFFORTS)

ANSWER: Part I

1. CASH LOAN

2. CREDIT FOR MERCANDISE

3. CREDIT CONSUMER DURABLES

4. CREDIT OR SALE OF MOVABLE

5. Merchandise Return-swap

6. Debtor substitution

Part II

7 to 10 – Give at least 4 type drastic recovery efforts

Cash loan, unsecured

Merchandise credit, unsecured

Consumer durables, installment

Movables, chattel mortgage

Trust receipt of

Real state sale on installment

Loan secured by real state

Credit o btained thru deceit

POSTDATED CHECK

The date of issue on the check is a future date. It could be just one day in the future, like for tomorrow,
still, it is a postdated check. As a general rule, field collectors should not accept postdated check.
However, if the check is postdated for 1 or 2 days, it would be alright to accept it.

ANTEDATED CHECK

This is opposite of a postdated check. It is dated in the past. For example, if today is March 17, 2004, the
check is dated yesterday, or last February 14. Or January 28, 2004, if nothing else is wrong with the
check, an antedated check is acceptable-except if the date on the check is more than 6 months, in which
case, it becomes stale and no longer valid. Any bank will refuse to honor it.

ALTERED CHECK

If the amount, date, or any entry has been altered, the owner of the check must sign in that alteration. If
there are too many alterations, it would be wise to reject the check.

UNSIGNED CHECK

An unsigned check is worthless.

UNDATED CHECK

It is essential that a check be complete on its face. All these must be filled out: date, payee, amount in
numbers, amount in words, and the drawer's signature. The payee is the person to whom the check is
issued. His name is written after the preprinted phrase "pay to the order of"; for example, a check would
read: "Pay to the order of: Linda Perez." Linda Perez is the payee.

THIRD-PARTY CHECK

Most of the time, the installment customer is also the owner of the checking account. If the installment
customer is not the owner of the checking account (the check was issued to him by someone else) it is a
3rd party check and it is always advisable to reject that kind of check. For example, your installment
customer, Maria Cuden, presents to you for payment a check issued by someone else. The name of the
issuer of the check is unknown; the signature is difficult to read. If the check is accepted and eventually
dishonored by the bank (bounced), it will result in a lot of complications.

YOUR COMPANY AS PAYEE

Always insist that the check be issued in the name of your company. For example, the check should
read: "Pay to the order of Abracadabra Appliances. This is for the protection of everyone. It cannot be
encashed by anybody else should it be lost or taken by someone.

BEARER CHECK

A bearer check is one where the payee is either "bearer" or "cash". This means that the bearer or holder
of the check also owns it. It can be encashed at the bank by the bearer, or whoever holds it. A pay to cash
checks is a bearer check.

DEFACED OR TORN CHECK

When certain parts of the check are missing, defaced, or torn, such as check number is incomplete, the
check is worthless. If the check has been marked by words like VOID, NOT VALID, it is also worthless.

CROSSED CHECK

The owner of the check would sometimes cross the check. This is a marking, usually 2-straight diagonal
lines, made in the top left-hand corner of the check. When a check is crossed, it means that the check
could only be deposited in a bank in the account of the payee. It cannot be enchased or used to pay
someone else. The intention of the owner of the check is to make sure that the check is deposited to the
bank account of the payee, and that payee only. This is done to protect both parties, the issuer of the
check and the payee. If your installment customer issues his check payable to your company and he
crosses the check, you may accept
CORPORATION AS PAYEE

When a check is payable to a corporation, and a customer wants to pay with that check, it would be best
to refuse to accept. For example, if a check was issued by the Provincial Government in favor of Tricor
Industries, Inc. and a walk-in customer pays with this check, it might result in a lot of complications. While
the check would surely be funded, being a government check, there must be an authorization by a
resolution of the Board of Directors of Tricor Industries authorizing someone to cash the check or to
negotiate it. These are difficult to obtain and if it is made available, difficult to ascertain as to its
genuineness.

BUSINESS NAME AS PAYEE

In a check which says: "Pay to the order of FLYING A", the payee is either a corporation or a trade or
business name. If your installment customer has a check payable to Flying A, and the check is a
government check, or a check issued by a well-known private organization, and you are aware that Flying
A is the trade name of your customer's business establishment, you may assume that the check was
issued to him as payment for his goods or services. You may accept this check.

AMOUNT IN FIGURES DIFFERENT FROM AMOUNT IN WORDS

An example. "Pay P 254.00- Two Hundred Forty-Five Pesos only". When this happens, either refuse the
check or politely ask the issuer of the check to issue another one correctly done.

By law, in case of case of conflict, the amount of words will prevail. However, this kind of check will always
be rejected by any bank.

GOVERNMENT CHECKS

All government checks, whether national (DENR, PNP), provincial or municipal, always have 2
signatures. If one signature is missing, do not accept.

CERTIFIED CHECK

It is a check issued by a checking account depositor which has been certified by the bank as being
funded. In fact, the amount on the check has already been deducted from the depositor's balance. This is
a good check. However, it is cashable only at the bank. If it is deposited in another bank, or in another
town, the check must undergo clearing procedures.

MARKINGS AT THE BACK OF THE CHECK

When a case has markings in the back, it is possible that the check has already been negotiated by
someone else. One must be highly suspicious with this kind of check. If you find a marking at the back of
a check which says: "For deposit only to the Account of ABC, Inc. Account No. 0001111 at the Masipag
Bank", that check could only be deposited at the specified account number at the specified bank. No one
else can make use of this check. If the collector is paid this kind of check, it must be rejected outright.
 CHAPTER 11: HANDLING CHECKS

SET B: QUESTIONNAIRE

IDENTIFICATION

1. A blank is an order to pay.

Answer: CHECK

2. The date of issue on the check is a future date.

Answer: POSTDATED CHECK

3. A check that is dated in the past.

Answer: ANTEDATED CHECK

4. A check that is issued to him by someone else.

Answer: THIRD-PARTY CHECK

5. A check issued by a checking account depositor which has been certified by the bank as being
funded.

Answer: CERTIFIED CHECK

TRUE OR FALSE

1. An application fee may be paid by check.

Answer: TRUE

2. If the check is postdated for 1 or 2 days, it would be alright to not accept it.

Answer: FALSE

3. An antedated check is acceptable-except if the date on the check is more than 8 months.

Answer: FALSE

4. An unsigned check is worthless.

Answer: TRUE

5. If the check has been marked by words like VOID, NOT VALID, it is also worthless.

Answer: TRUE
Group 6,SOME LEGAL ASPECTS OF CREDIT

Guaranty

- a legal agreement in which a person or organization promises to pay back a loan if the person or
organization that originally borrowed the money.

Surety

- a person who accepts legal responsibility for another person's debt or behavior, or money given
as a promise that someone will do something that they have promised to do.

Guarantor

- is a person who helps someone who's borrowing money by promising to pay it back to the lender if the
borrower is unable to.

Guaranty versus Surety

There would come an occasion when the credit and collection manager will encounter a credit application
will encounter a credit applicant whose capacity to pay, while verifiable, as not been established.

An example is the fresh college graduate employed for the first time. Even if his appointment has become
permanent by the completion of a probationary period, there is always the possibility that he might be
terminated for cause, or e might just quit his job.

The law on guaranty ( Acts. 2047 to 2084, Civil Code ) states that the guarantor is only secondarily liable
and he is required to pay only if the principal cannot pay. In a credit transaction with a guarantor, there
are 2 debtors: the principal debtor or obligor and the guarantor, whose obligation to pay is only secondary.

The word cannot has been emphasized because the guarantor is required to pay only if all the resources
of the principal debtor has been fully exhausted and if all available legal remedies have been applied.

If the intent of the creditor is to have someone sign a promissory note as another principal debtor, that ( if
he consents to it ) is called a co-principal. Art. 2047, paragraph 2: “if a person binds himself solidarily with
the principal debtor, the provision of Section 4, Chapter 3, Title II, shall be observed. In such case the
contact is called a suretyship.

He who signs a suretyship contract binds himself to the debt solidarily. Art. 1207 states that: “there is
solidarily liability only when obligation expressly so states.”

A solidary obligation is one where each one of the debtors is liable to pay the full amount.

For example, A borrowed P 10,000 from B and C signed the promissory note, which expressly stipulates
that the obligation is solidary. If A does not pay, B can compel C to pay the full P 10,000. Note that the
verb used is “does” and not “cannot”. By the mere refusal of the debtor, A in this example, the creditor B
can immediately go after C.

The existence and validity of a solidary obligation cannot be presumed. It must be expressly indicated in
the promissory note or contract of loan. It must also have the “informed” consent of the person signing a
solidary obligation.

For example, if he was asked to sign the promissory note to guarantee the loan, and even if the contract
provides clearly that the obligation of the co-signer is solidary, it would be difficult to enforce this obligation
against the co-signer, whose understanding of his act of signing the promissory note is that of guarantor.
In contracts, consent is absolutely necessary.
 FORFEITURE OF INSTALLMENT MADE

In sales of personal property (TV, refs, motorcycle) by installments, or leases of personal

property who option to buy, the seller and the buyer may stipulate that the installments or rents are not to
be returned.

This is provided for in Article 1486.

- Regulate the state of personal property via installment.

In the sale of real estate by installment Republic Act NO 6552,

provides protection for buyers.

The buyer shall have the right to pay in advance any installment or the full unpaid balance of the
purchase price any time without interest and to have such full payment of the purchase price
annotated in the certificate of tittle covering the property.

Buyers who have paid at least 2 years of installments are entitled to either , pay the balance so
be will own the property, or if the sale is cancelled, he is entitled to a refund of 50% of his installment
payment.

What about condominium units? The buyer usually takes possession and ownership. Is the buyer entitled
to a refund, as R.A NO. 6552 provides.

There are 3 parties to the transactions:

 The seller or the real estate developer

 The buyer

 The bank

The ownership of the condominium unit is transferred, by way of absolute sale, to the buyer who
mortgage it to a bank to pay the real estate developer.

There are 2 transactions:

 The Sale

 The mortgage

In the case, the law on mortgages will apply and no refund is required.

Payment of Execution and Registration of the Sale

Expenses for the execution and registration of the sale of the property is to be the
responsibility of the vendor, unless expressly stipulated.
Steps on how to Register a Real estate property

 Step 1: Prepare the Deed of Sale

 Step 2: Go to City’s Assessor’s Office

 Step 3: Land Tax Division of City Treasurer’s Office

 Step 4: Proceed to the Bureau of Internal Revenue

 Step 5: Municipal Treasurer’s office

 Step 6: Registry of Deeds

 Step 7: Municipal Assessor’s Office

Who Pays for the Deficiency

In a pledge, in case of non-payment the property pledge is sold at public auction and the sale
proceeds goes to the pawnshop cannot collect the difference from the pledger. If the proceeds of the sale
exceeds the loan, the excess is kept by the pawnshop.

In a real estate mortgage, if the proceeds of the foreclosure sale is not enough to pay the loan, the
mortgage or the creditor is entitled to recover the deficiency (Sec. 6, Rules of Court). In most cases,
however, especially foreclosure by banks, the highest bidder is the bank-creditor itself and the amount bid
is equal to the amount owed.

In such a procedure, there is no deficiency. The buyer’s obligation is extinguished and the creditor
becomes the owner of the mortgaged property subject to the redemption rights of the property owner.

In a chattel mortgage, Article 1484 of the Civil Code states that if the creditor chooses to foreclosure,
he is no longer entitled to recover any unpaid balance.