Leonor, Joshua Andre

2D
Licup, Jonida Sofia Cristine
Orlino, Mark Frederick
Santiago, Vivian Joy

1. Mr. A bought a real property from Pilipinas Realty on monthly installment for 5
years. He paid 20% downpayment of P4m. He will pay a monthly amortization of
200K and a balloon payment of P6m. Late payments are subject to 8% interest per
annum. In order to finance his downpayment, he took a loan of P3m from his
employer, 123 Bank. The payment of loan was through a salary deduction of P10k.
The loan has an interest of 10% with penalty for late payments. Mr. A mortgaged
his interest on the contract to sell to 123 Bank as security. Mr. B also acted as a
guarantor for the loan. On the 4th year, Mr. A incurred leave without pay for 6
months. As a result, Mr. A defaulted on the monthly amortization for 9 months.
Pilipinas Realty sought to cancel the contract to sell over the property. Identify the
possible laws and issues that would put Mr. A in the best financial position after
default. Or possible remedies to maintain the contract to sell.

● A possible remedy for Mr. A to maintain the contract to sell would be under the Republic
Act No. 6552, or the Realty Installment Buyer Act (Maceda Law) since it provides the
possible remedies available to him as a buyer of real estate property in installments.

Under Section 3 of RA 6552, the buyer, having paid for at least two years, is entitled to
the following rights in case of default in the payment of installments:
1. To pay, without additional interest, the unpaid installments due within the total
grace period earned which is fixed at the rate of one (1) month grace period for
every one (1) year of installment payments made. However, this right may be
exercised only once every five (5) years of the life of the contract and its
extensions, if any.
2. If the contract is canceled by the seller or developer, the buyer is entitled to get a
refund equivalent to fifty percent (50%) of the payments (or cash surrender
value) made on the property. After five (5) years of installments, the buyer is also
entitled to an additional refund of five percent (5%) every year, but not to exceed
ninety percent (90%) of the total payments made. However, the actual
cancellation of the contract should take place after thirty (30) days from the
receipt of the buyer of the notice of cancellation or demand for rescission of the
contract through a notarial act, and full payment of the cash surrender value.

The down payments, deposits, or options on the contract shall be included in the
computation of the total number of installment payments.
 The law mandates that a contract may only be canceled after 30 days from receipt by
the buyer of the notice of cancellation or the demand for rescission of the contract by a
notarial act, and upon the full payment of the cash surrender value.

Here, the facts do not show that Mr. A received a notice of cancellation or that Pilipinas
Realty demanded the rescission of the contract through a notarial act, nor has Pilipinas
Realty returned the full cash surrender value of the property to Mr. A. This will allow Mr.
A to retain the contract to sell.

It also follows that Mr. A, who was able to pay for four years before being defaulted, can
pay the unpaid installments within four months without additional interest, in line with the
grace period of one month for every one year of installment payments made afforded
him by the law.

Assuming arguendo that the contract is canceled by means of a notarial act, Pilipinas
Realty shall refund to Mr. A the cash surrender value of the payments on the property
equivalent to 50% of the total payments made, and, after five years of installments, an
additional 5% year, but not to exceed 90% of the total payments made.

● Seeing that the remaining debt on the loan amounts to P2,520,000, excluding interests,
Mr. A could avail himself of the option available to him under Section 103 of Republic Act
No. 10142, or the Financial Rehabilitation and Insolvency Act of 2010, which is to file a
petition for voluntary liquidation. This is an act of insolvency that will place him in the
best financial position after default.

Mr. A may be considered an insolvent individual debtor as defined under RA 10142 —

he is a natural person who is a resident and a citizen of the Philippines, and is generally
unable to pay his liabilities as they fall due in the ordinary course of business, or has
liabilities that are greater than its or his assets. The said law enables individual debtors
to file for insolvency proceedings.

Under Section 103 of RA 10142, an individual debtor whose properties are not sufficient
to cover his liabilities, and owing debts exceeding P500,000.00, may apply to be
discharged from his debts and liabilities by filing a verified petition with the court of the
province or city in which he has resided for six months prior to the filing of such petition.
He shall attach to his petition a schedule of debts and liabilities and an inventory of
assets. The filing of such a petition shall be an act of insolvency.

Suppose the Court issues the liquidation order pursuant to Section 12 of RA 10142, in
that case, Mr. A, the debtor, is declared insolvent, the debtor’s liquidation and the sheriff
taking possession and control of all the debtor's property except those that may be
exempt from execution shall be ordered, and any claims and conveyance of any
property due the debtor shall be directed to the liquidator, among others.
 2. Mr. Z had P5M and wanted to put up a business. He decided to form a corporation,
ZYX Inc., with a capitalization of P4M. To start his desired business, he needed
additional financing of 10M. ZYX Inc. obtained a loan of 8M from 456 lending
investor secured by a mortgage on his personal property. Mr. Z also executed a
surety agreement to secure the loan. The loan was subject to a 5% interest per
month. The loan has a cross default provision. In order to buy the merchandise,
Mr. Z bought the goods on installment on his credit card with a 1% interest per
month for 1 year. He was not able to pay his monthly installment starting on the
5th month. His credit card rate is 3.5% per month. For the first month operation,
his business margin was 20%. He expects his business margin to improve to 35%
within a year. Advise Mr. Z whether he should continue with the business. If he
defaults on any of the loans, what would be the impact?

● Mr. Z should not continue with the business.

The cost of debt outweighs the expected profit of Mr. Z. Considering that the loan
payment currently amounts to P4,800,000 million, in addition to Mr. Z having defaulted
with the credit card payments amounting to P2,660,000, the total cost of the debt is
P7,460,000. The expected profit based on the 35% margin would only reach
P6,461,538, which is P998,462 short of covering the total cost of debt. This means that
the business is not feasible in the long term.

The cross-default provision is the final blow in this matter. It operates to put a borrower
in default on all of his other obligations should he default on one. Since Mr. Z already
defaulted on his monthly credit card installments on the fifth month, this became the
catalyst to trigger the cross-default provision with his other obligation with 456 Lending
Investor.

Hence, it is advised for Mr. Z to cut his losses and discontinue the business as it is no
longer viable given the circumstances. He may file for insolvency which will lessen the
burden of securing payment, but he will ultimately have to suffer losses in his assets.

● If Mr. Z defaults on any of the loans, this will automatically result in the default of all the
other loans because of the existence of the cross-default provision. This could trigger a
range of negative consequences, including insolvency, damage to one’s credit score,
foreclosure or repossession, collection calls, and even a lawsuit.

Capitalization
Mr. Z - P4,000,000
456 Lending - P8,000,000
Total Capital - P12,000,000
 Current Sales Expected Sales

100% Sales P15,000,000 100% Sales P18,461,538

80% Cost of P12,000,000 (assuming 65% Cost of P12,000,000 (assuming

Goods Sold the whole amount is Goods Sold the whole amount is
used to buy merch) used to buy merch)

20% Margin P3,000,000 35% Margin P6,461,538

Installment Payment Interest Outstanding Balance

1st Payment 1,000,000 (1%) 120,000 12,000,000

2nd 1,000,000 (1%) 110,000 11,000,000

3rd 1,000,000 (1%) 100,000 10,000,000

4th 1,000,000 (1%) 90,000 9,000,000

5th 0 (3.5%) 280,000 8,000,000

6th 0 (3.5%) 280,000 8,000,000

7th 0 (3.5%) 280,000 8,000,000

8th 0 (3.5%) 280,000 8,000,000

9th 0 (3.5%) 280,000 8,000,000

10th 0 (3.5%) 280,000 8,000,000

11th 0 (3.5%) 280,000 8,000,000

12th 0 (3.5%) 280,000 8,000,000

TOTAL P4,000,000 P2,660,000 P8,000,000

Cost of Debt Expected Profit

P7,460,000 P6,461,538
Recommendation: File for insolvency

Cost of Debt

Loan 8,000,000 x 5% x 12 months

 = P4,800,000

Credit Card Default P2,660,000

Total Cost of Debt P7,460,000