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Drowning in debts and payables: What an individual debtor can do

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Recently, the biggest bank[1] in the Philippines BDO Unibank, Inc recently declared that it had incurred a net loss of P4.5 billion in the second quarter of 2020[2]. Its bad loans amounted to P22.43 billion, a whopping 650% increase from last year’s Php2.99 billion. It also anticipated potential delinquencies due to the COVID-19 pandemic. It appears that a lot of Filipinos are unable to pay their loans and other obligations. That should not come as a surprise as Filipinos find that their life had worsen during the COVID-19 pandemic [3] and a significant segment, at least 37% of adult Filipinos, anticipate that their life will worsen in the next twelve (12) months [4]

With the grace period and other benefits of “Bayanihan Heal As One Act” having run its course [5], what can an individual debtor do when he is unable to pay his loans and obligations?

Under Chapter IV of Republic Act No. 10142 otherwise known as “Financial Rehabilitation and Insolvency Act (FRIA) of 2010,” an individual debtor is provided several options to deal with this issue.

Who is an individual debtor?

The FRIA Law defines an individual debtor as “a natural person who is a resident and citizen of the Philippines that has become insolvent.”[6]

When is an individual debtor deemed as insolvent?

An individual debtor is deemed insolvent when under his financial condition, he “is generally unable to pay its or his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets.

What can an individual debtor do when he becomes insolvent?

An individual debtor, when he becomes insolvent may file a Petition, on his own initiative, before the appropriate court, (1) for the suspension of payments [8] or (2) for voluntary liquidation. [9]

What are the remedies of a creditor of an insolvent debtor?

For creditors of an insolvent individual debtor, they may file a petition, on their own initiative and before the appropriate court, for an involuntary liquidation.[10]

What are the requirements and effects of the filing of a petition for suspension of payments?

Under suspension of payments, the individual debtor shall submit (a) a schedule of debts and liabilities, (b) an inventory of assets, and (c) a proposed agreement with his creditors as attachment to his petition. When a petition for suspension of payment is filed, execution against the petitioner shall be suspended for a maximum of three (3) months and subject to a few exceptions, no creditor is allowed to sue or institute proceedings to collect his claim from the debtor from the time of the filing of the petition for suspension of payments and for as long as proceedings remain pending. [11]

What are the effects and requirements for the filing of a petition for voluntary liquidation?

In voluntary liquidation, an insolvent  individual debtor owing debts exceeding Five hundred thousand pesos (Php500,000.00), 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 (6) months prior to the filing of such petition. The debtor must attach to his petition a schedule of debts and liabilities and an inventory of assets.[12] If the court finds the petition meritorious, it shall issue a Liquidation Order within five (5) working days.[13] 

What are the contents of a Liquidation Order?

The Liquidation Order shall (a) declare the debtor insolvent; (b) order the liquidation of the debtor and, in the case of a juridical debtor, declare it as dissolved; (c) order the sheriff to take possession and control of all the property of the debtor, except those that may be exempt from execution; (d) order the publication of the petition or motion in a newspaper of general circulation once a week for two (2) consecutive weeks; (e) direct payments of any claims and conveyance of any property due the debtor to the liquidator; (f) prohibit payments by the debtor and the transfer of any property by the debtor; (g) direct all creditors to file their claims with the liquidator within the period set by the rules of procedure; (h) authorize the payment of administrative expenses as they become due; (i) state that the debtor and creditors who are not petitioner/s may submit the names of other nominees to the position of liquidator; and (j) set the case for hearing for the election and appointment of the liquidator, which date shall not be less than thirty (30) days nor more than forty-five (45) days from the date of the last publication.[14]

What is the legal effect of a Liquidation Order?

When a Liquidation Order is issued by the court, the legal title to and control of all the assets of the debtor, except those that may be exempt from execution, shall be deemed vested in the liquidator or, pending his election or appointment, with the court. Under the same, all contracts of the debtor shall be deemed terminated and/or breached, unless the liquidator, within ninety (90) days from the date of his assumption of office, declares otherwise and the contracting party agrees. No separate action for the collection of an unsecured claim shall be allowed, and if such actions are already pending, it will be transferred to the Liquidator for him to accept and settle or contest. With a Liquidation Order having been issued, no foreclosure proceeding shall be allowed for a period of one hundred eighty (180) days.[15]

What about involuntary liquidation?

A creditor or a group of creditors with a claim or aggregate claim of Five Hundred Thousand Pesos (Php500,000) against the insolvent individual debtor may file a petition before the appropriate court, for liquidation of the individual debtor. The court will determine whether or not an individual is insolvent in consideration of “acts of insolvency” enumerated under the FRIA Law.[16] The creditors must post a bond as directed by the court, and be subjected to the condition that if the court finds that the individual debtor is not insolvent, the creditors shall pay costs, expenses, damages, and attorney’s fees to the debtor. On the other hand, if a good cause is shown, the court may forbid the individual debtor from making payments of any debts and alienating any property that belongs to him, subject to non-impairment of the rights of a secured creditor.[17] 

If the insolvent individual debtor is declared in default, a Liquidation Order, as discussed above shall be issued by the court. [18] If he is deemed an absentee individual debtor, the petitioning creditors may ask the court to order the sheriff take into his custody a sufficient amount of property of the individual debtor to satisfy the demands of the petitioning creditors and the costs of the proceedings.[19]

Are there any other remedies aside from those provided under FRIA Law?

There are also other remedies provided under different laws, but what’s distinct about the method provided under FRIA Law is that it allows the debtor to initiate the proceedings. Usually, it is the creditors who go after the debtor by filing a collection suit, like a Small Claim or collection for sum of money,  or a criminal case like Violation of B.P. No. 22 or Estafa under the Revised Penal Code (RPC). For the best course of action most suitable for your circumstances, it is still advisable to consult and to avail of the services of a lawyer. 

Lawrence P. Villamar is a private lawyer. He teaches Commercial and Business law at the Divine Word College of San Jose, and Public Administration subjects at the Polytechnic University of the Philippines (Open University System) in Sablayan, Occidental Mindoro. He operates the VILLAMAR LAW OFFICE located in San Jose, Occidental Mindoro. 

[1] https://www.bdo.com.ph/news-and-articles/BDO-The-Asian-Banker-Strongest-Bank-Philippines-2019 [2] https://www.philstar.com/business/2020/07/28/2030991/bdo-shifts-net-loss-p45-billion-q2[3] https://www.sws.org.ph/swsmain/artcldisppage/?artcsyscode=ART-20200813222204[4] https://www.sws.org.ph/swsmain/artcldisppage/?artcsyscode=ART-20200821165208[5] https://rappler.com/nation/malacanang-bayanihan-act-expire-june-25-2020[6] Sec. 4 (o) of RA No. 10142[7] Sec. 5 (p) of RA No. 10142[8] Sec. 94 of RA No. 10142[9] Sec. 103 of RA No. 10142[10] Sec. 105 of RA No. 10142[11] Sec. 96 of RA No. 10142[12] Sec. 103 of RA No. 10142[13] Sec. 104 of RA No. 10142[14] Sec. 112 of RA No. 10142[15] Sec. 113 of RA No. 10142[16] Sec. 105 of RA No. 10142[17] Sec. 107 of RA No. 10142[18] Supra[19 Sec. 108 of  RA No. 10142

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