Atty. Rami Hourani
I briefly contemplated naming the article something like “Tang-tang Utang” or “Walang Wawarts” but decided against it.
The Kinds of Debtors
Debt is a mainstay in the Philippines. Our view of debt is something akin to the friend we keep not because of their charm but because we think keeping them around might come in handy when times get tough. In my estimation, Filipinos on the whole fall into one of three camps of people with regard credit. Consistent with a population that exists on extremes of the spectrum on most issues, these three groups of people could not be more different.
The first camp is the people who do not borrow money at all, they say things like “Money is the root of all evil” and couldn’t imagine taking a loan under any circumstances. They have in the back of their mind the scandal of not being able to pay their utang whenever the topic of debt comes up. Their credit card stays in a drawer until its time to go to do the groceries and they know nearly too the peso exactly how much they will spend. The credit card statement is paid before the ink has even dried.
Second, there are the people who keep debt, whether large or small, whether a minor annoyance or soul crushing to manage from month-to-month they “just figure it out”. They have little idea how the number is arrived at that they must pay but the begrudgingly pay it off. These people often have the newest gadgets and gear almost as soon as it hits the shelves. They are quick to point out how little they have to pay month to month for the things they buy. They seldom have an idea how much of their income goes to all these odds and ends whether small or large.
Third, the smallest group, the ones who see debt as something to be optimized and utilized. These people keep credit cards but only for business expenses and never carry a balance. If they see the bank charge them a few thousand pesos of pre-payment fees when they pay a loan early, they go straight to their bank manager and argue about it. Debt is a tool and they are not afraid to use it. They may even go so far as to say that it is stupid for people to spend their own money on business endeavors when other people are willing to do it at such low interest rates.
What do we call it
Let me disabuse you of a misconception you have right now. All of three of these groups have people in them who will fall behind on payments on debt. As a lawyer, I have seen people from each of these groups give me the exact same look of shame and regret as they tell me about the unfortunate circumstances that led them to be unable to pay off their debts as and when they become due. This is called a state of insolvency.
In the first group, the story could be a beloved relative got seriously ill and needed medical treatment. In the second group, the balance is upset and the monthly payments become impossible to keep up with, sparking a cycle of borrowing to pay. In the third group, a trusted business partner may do something underhanded and leave you with an empty bag. It doesn’t matter how, it doesn’t matter why, the point is these people need help and have no idea how to do it. They are often only consulting me and other members of the Philippine bar because court cases are being threatened or have already been filed.
They are often surprised to hear that there exists a kind of reset button in the law. It is painful to press and comes at great personal cost but it allows someone to start again with no debt. This process is called an insolvency proceeding. This is where Bankruptcy and Lawyers intersect.
The Law
When a bank, money lender or basically any kind of creditor lends you money with interest one of the things they are implicitly doing is making the bet that you will be worth more tomorrow than you will be today. The creditor then lends you money to buy a car, or a house, or a machine, a motorcycle or anything that you can think of that you can put to use. Driving to work will allow you to work longer than if you had to contend with public transportation. A house will save you the amount you’d have otherwise paid in rent. A machine will allow you to reduce the staff you hire.
In the vast majority of cases, when the bets are made responsibly by lenders interested in the welfare of their clients, the debt is eventually paid off. The debtor is in a better place than he would have been had he undertaken the endeavor or purchased a needed item with his own cash. The creditor, for his part, saw his principle returned to him and was compensated by the interest that he collected. For large institutional creditors like banks, they have very sophisticated methods of deciding how much interest to charge and will build their losses into the rates they offer.
An insolvency proceeding is what needs to happen when the bets of a group of creditors with regard a particular creditor does not pay off. This normal and it is built into the business model. This is why you will notice that the loans that are available for specific and profit-driven financing agreements will have lower interest rates than that of say a credit card which can be put to anything, even turned to cash.
The Pain
Do not be mistaken in concluding that this is an easy process to undergo and one walks out without any debt and not a care in the world. The first advice you will receive from your lawyer on the issue is that you pay your debts. While insolvency is to be expected, this does not mean it is a frivolous affair. It is a deeply consequential event.
You will have to give up everything of substantial value that you own. Do you have a house? Sold, here’s 300,000 pesos from the sale. Do you have a car? Sold. Do you have a condo? Sold. Jewelry? Sold. Gadgets? Sold. There are small exceptions that the law makes to preserve the dignity and family of the debtor but the rule for the most part is that everything must be sold or used to satisfy the claims of debtors. If the debtor is a corporation, everything is sold and the corporation ceases to exist.
If your property is sold this way, it is going to sell at a steep discount as is common in forced sale transactions. This means that if you have anything of value to sell that might pay off your debts, it is almost always better to sell your property yourself and negotiate that your debts be paid off. However, sometimes it cannot be helped, the debtor may have little to no property or even if they have property it is of a nature that makes it difficult to convert to cash. In this case, liquidation will probably be the only option left to you.
There are different requirements for each of the different scenarios: whether it is an individual debtor or a corporate debtor and whether the proceeding is voluntary or involuntary. In broad strokes though, a petition will be filed. If it is sufficient in form and substance an order of liquidation is issued and a liquidator appointed. All the property not exempt from execution will be given into the care of the liquidator who has the unenviable task of dividing up the property between the creditors.
Photo by Jakob Owens on Unsplash
If all the procedure was followed, you will be free from your debts. Liters of tears will have been shed and you will sweat bullets at your days in court but you will do so with a view to putting the mound of debt behind you.
A Small Note
If before you decide to pursue the path of liquidation, you decide to fix things yourself then I congratulate you on your mental fortitude. I just have a few words of advice for you. In paying off your debts do not sell off anything that is subject of a chattel mortgage. This is a kind of security constituted over movable property. This is because to sell something that is subject of a chattel mortgage without the consent of the creditor is a crime. An easy example of something that is subject of a chattel mortgage is a car which payments are still being made on.
If you find yourself in the situation where you need to declare insolvency or even just want to be made aware of options that are available to you, then I strongly recommend you speaking with a lawyer. The foregoing article is of a general and informational nature and cannot substitute legal advice. That said, thank you for reading and I hope you never need my advice!
Atty. Hourani practices law in Cebu City. If you would like to set an appointment with him, you may reach him here.