Legal Aspects of Credit Collection

Chapter 5: Legal Aspect
of Credit and Collection
Presented by:
Ribleza, Michael Jaye P.
Learning Objectives:
The learners shall be able to
 explain the code of credit information exchange

 identify the elements of credit
 explain the causes of credit risk
 Discuss the financial factors to check on credit
applicant
College of Accountancy, Business and Governance

Legal Collection Efforts
There are many legal and extra-legal remedies or

techniques that may be used to shorten, secure, improve
and salvage a seemingly hopeless money claim position.
Knowing and understanding what extra-legal remedies or

techniques can be accomplished and effectively used will
increase one’s chances of collecting through court action.

Rationale in Pursuing Legal Collection Efforts
1. It is the necessary and logical thing to do

2. To serve as leverage against the debtor
3. You are a necessary party to the case
4. As a mode of redress
5. As a dilatory tactic
6. Avoidance of liability
7. Nuisance suit

General Problems Affecting Legal Collection Efforts
1. Absence or lack of supporting documents

-Endeavor to get the debtor to acknowledge his obligation in
writing, either by letter, note and the like.
-Once the debtor acknowledges the obligation you may use a
collection tool called a DEBT REPAYMENT AGREEMENT OR A
PAYMENT CONTRACT – an agreement between the creditor and
debtor, the latter acknowledging his debt to the creditor without
the need for any other proof about the obligation.
-You may also require the debtor to sign in your favor a
promissory note.

2. Insufficient Documents – Try to complete or submit secondary

evidence.
3. Signed by an Attorney-In-Fact – endeavor to check with the

principal and the notary public about the validity and
genuineness of the signatures – have the power of attorney
authenticated by the notary public/principal.
4. Unregistered document – “Register” the documents as soon as

possible.

5. Unnotarized document - have the document “notarized”. If there

are two parties on the documents signing in different places,
have the document notarized at both places.
6. Unknown debtor’s whereabouts – check with a third party with

your field personnel.
7. Summons cannot be served – try the substituted service method of

serving the summons by publishing the summon in a newspaper of
general circulation.

8. Debtor’s properties are substantially encumbered or disposed –

endeavor to check all the liens, encumbrances are conduct an
inspection and appraisal to determine whether or not their
mortgage values are small or what below their market values.
9. Debtor have filed for voluntary insolvency and/or suspension of

payment – check with the court or SEC if it is a corporation,
partnership or single proprietorship about the case and file a
claim soonest with the court and/or receiver appointed where
the petition for voluntary insolvency was filed.

10. Debtor’s business have been assigned/transferred or taken over

by a new owner – File for violation of the provisions of the Bulk
Sales Law Act 3952 as amended by RA 111, with a preliminary
attachment against any remaining assets and/or the ones
transferred or assigned.

The Legal Collection Process
1. Sending of proper demands to the party – obligor – debtors.

2. Gathering, preparation and review of actionable documents; and
credible, competent witnesses.
3. Complaint preparation.
4. Filing of the case.
5. Service of summons.
6. Reply of the parties to the case: grounds for delay:
a. Motion to dismiss is either on the following grounds”
- No cause of action
- Prior payment
- Venue is an issue
- Wrong party

The Legal Collection Process
6. Reply of the parties to the case: grounds for delay:

b. Motion for bills of particulars (for documents)
c. Motion for discovery/deposition for evidence and witnesses
needed in the expeditious resolution of the case.
d. Motion for extension of time to file an answer either due to
the absence of lawyer, sickness, absence of the property, other
plausible reasons.
e. Other legitimate/dilatory tactics.

Legal and Extra-Legal Techniques To Shorten Court
Litigation
There are various legal ways provided under the Rules of Court
which, if attorneys will recall, it had been taught in school that
the efforts in litigation for cases will be shorten substantially.
Among the techniques by the Rules of Court are the following:
1. DISCOVERY - is the disclosure of facts, deeds, documents and

other information that are in the exclusive possession or
knowledge of a party or witness

Litigation
I. DISCOVERY – the purpose of discovery is to enable the parties,

consistent with recognized privileges, to obtain the fullest
possible knowledge of the issues and facts before civil trials and
thus, prevent the said trials are carried

Litigation
Modes of Discovery:
1. Deposition – the written testimony of a witness given in the course
of judicial proceedings in advance of a trial or hearing upon oral
examination, or in response to written interrogations or questions
by the other party, and where an opportunity for cross
examination is given. Deposition taken during the pendency of an
action is generally termed “deposition de bene esse” and those
taken in advance or prior to the institution of an action are called
“depositions in perpetuam rei memoriam” – perpetuation of
testimony.

Litigation
Depositions are generally taken due to the following:

a. Impending departure of the deponent from the country.
b. Certain facts and information cannot be obtained except by
deposition.
c. Due to the age, infirmity of the witness.
d. Witness (deponent) resides in a remote place from the place of
the hearing of trial.

Litigation
Modes of Discovery:
2. Interrogatories to Parties – are not part of a pleading of the case
unlike in deposition. They are merely forms of examinations prior
to a trial or hearing of a case. They are directly upon the adverse
party unlike in interrogatories where they are served through a
duly authorized officer who must record the answer thereto.

Litigation
Modes of Discovery:
3. Admission by the Adverse Party is generally availed of after the
plaintiff and he defendant have filed their pleadings. It is the
request by one party to the other party for the admission of the
genuineness of any relevant document described in and exhibited
with the request or of the truth of any relevant matter of fact set
forth in the request.

Litigation
Modes of Discovery:
4. Production or Inspection of Documents or Things. Upon prior
motion and permission by the court, any party to a case may
request the court to order the other party to allow inspection or
production of any document or things fro examination,
photography and the like, as well as to allow the entry of the
requesting party into a property to inspect, survey, measure and
the like.

Litigation
Modes of Discovery:
5. Physical and mental examination of persons – In an action where
the physical or mental condition of a party is in question, the
court may, at its discretion, order a physical and mental
examination by a competent physician.

Litigation
II. SUMMARY JUDGMENT – is a court decision upon a claim, counter

claim or cross claim or upon a declaratory relief, granted anytime
after the pleading in response thereto has been served. It is
principally intended to expedite or promptly dispose of a case
where the facts appear undisputed and certain from pleading,
disposition, admission and affidavits submitted.

Litigation
III. JUDGMENT OF THE PLEADINGS– where the debtor/defendant

admits all he material allegations in the creditor/plaintiff’s
complaint and there is no issue or point of disagreement between
them, except payment.

Litigation
IV. JUDGMENT ON DEMURRER TO EVIDENCE – It is a remedy availed of

by the defendant after the plaintiff has completed the
presentation of his evidence. The defendant, without waiving
rights to offer evidence the event the motion is not granted, may
move for a dismissal of the case filed against him on the ground
that upon the facts and upon the law, the plaintiff has not shown
or proved his right to a relief.

Litigation
V. ALTERNATIVE DISPUTE RESOLUTION IN COURT/BUSINESS – The past

Congress of 2003 passed Republic Act 9285 otherwise known as
the Alternative Disputer Resolution Act. The principal objectives
are:
- Reducing the dockets of the courts
- Faster resolution of conflicts
- Mitigating time, expense of the parties, attorneys and
judicial officers
- Reduce graft and corruption attendant to delayed resolution
of civil/criminal disputes
- More acceptable and lasting settlement

Litigation
VI. AMICABLE OR COMPROMISE AGREEMENT
1. Rationale or Motivation – a cliche among law practitioners state

that: “it is much better to agree to a bad compromise than to
engage in long, contentious, expensive litigation even if you
emerge the winner”. It is generally more economical and
practical to enter into a sufficiently reasonable amicable
settlement with the debtor/defendant than to fight it out in
court.

Litigation
2. Tactics to motivate a defendant to enter into a compromise or

amicable settlement:
a. Preliminary attachment or foreclosure threats on mortgaged
property, if applicable.
b. An offer or willingness to restructure or roll over the
debtor’s/defendant’s obligation.
c. “Stick and Carrot” Tactic – an offer to grant some concession
to the debtor/defendant with the intention of solidifying your
weak position, if any.

Litigation
2. Tactics to motivate a defendant to enter into a compromise or

amicable settlement:
d. Offer of assistance and help to the debtor.
e. Willingness to accept another party/co-obligor with the
debtor.
f. Threat of Court Suit – it must be remembered that when you
use this tactic and it fails, you must, of necessity and in order not
to lose your credibility, go through with the court suit
immediately.

Litigation
3. What to provide for in the compromise or amicable agreement:

a. The acceptance and acknowledgement of the debt by the
debtor and the other obligors including the surety.
b. Proposed repayment schedule
c. Time or schedule of payment
d. Interest, penalty provisions
e. Surety, collateral or security provisions, if agreed
f. Acceleration clause, a must

Litigation
3. What to provide for in the compromise or amicable agreement:

g. Non-novating clause on lien or encumbrance on security or
collateral, on the parties to the obligation, on decision already
obtained and other pertinent provision to fortify your position.
h. Specific place of payment and waiver of demand therefore.
i. Provision for reasonable attorney’s fees.
j. Right to demand a writ of execution in case of failure to
comply with terms or conditions therefore by the defendant.

Litigation
Special Power of Attorney
In pre-trial, you must always provide your counsel and/or

representative with a proper special power of attorney duly
authorized by the board of directors of your company and
properly executed by your duly authorized officer – corporate
secretary

Litigation
The Areas to Discuss with your Attorney-In-Fact are:
1. Acceptable amount of satisfaction/payment of your claim

2. Terms of payment
3. Parties to be bound under the case – preferably in joint and
several capacity
4. Collateral requirement
5. Authority to bind and sign
6. Other pertinent matters

Litigation
Hearing or Trial of the Case
The unnecessary postponement or delay in the hearing of a case can

be avoided or prevented if the following matters are checked,
provided for and readied days before the hearing:
1. Sherrif’s return of the service of the summons upon the parties.
2. Readying and reviewing proper evidence.
3. Readying and coaching competent and credible witnesses.
4. Determining available possible hearing or trial days if possible,
ask for cluster days for hearings to expedite presentation of your
case.

Litigation
Submission for Decision
1. Compromise Agreement – The law between the parties once

approved:
- Final and immediately executory
- Generally not appealable except when:
a. It does not reflect the real intention of the parties
b. It was granted in fraud
c. Granted by the court with grave abuse of discretion
d. Other grounds

Litigation
Submission for Decision
2. Granted Based on the Merits of a Case
Under the law, the court decision shall be rendered or a case

decided within 90 days from submission for decision. This,
however, is not followed by the courts for reasons of their own.
Judges almost always give some “plausible” reason for the delay
in their orders and/or decisions.

Litigation
Implementation of the Writ of Execution
The success or failure of a plaintiff/creditor to collect through the

court is influenced to a very large extent by the ancillary efforts
to do or not do any or all of the following:
a. Prior checking of the whereabouts, property or assets of the
defendant.
b. Proper selection, supervision and control of the sheriff to
implement the writ of execution is necessary, if you want to
obtain collection or satisfaction of the writ of execution.

Litigation
Guidelines in Auctions Sale of Real and Personal Properties
There are NO DEFINITE RULE upon which one can depend on to arrive
at a fairly reasonable price or value in case of auction sale of
mortgaged or levied upon properties.

Litigation
The general practice however is as follows:

a. REAL PROPERTIES
- Determine the FAIR AND REASONABLE VALUE of the property, as
well as any third party lien or encumbrance thereon.
- The bid price on the property is generally to the extent of the
debt claimed inclusive of interest, fees, publication expenses and
attorney’s fees.

Litigation

a. REAL PROPERTIES
- If the property value is LESS or EQUAL to the debt claimed, the
bid price may be the market value less the average cost of money
for the next two years. Auctioned real property is subject to one
(1) year REDEMPTION from the date of registration of the
certificate of sale. If no redemption is exercised. The cost of
money deducted from the bid price will at least cover up for the
time you will have to dispose and liquefy the property won in the
auction house.
Litigation

a. REAL PROPERTIES
- If there is a lien or encumbrance on the property, like a
mortgage or an ownership claim, then serious thoughts must be
given on whether to continue with the auction.

Litigation

a. REAL PROPERTIES
- If there is a winning bidder in the auction sale, it is imperative
that he be issued immediately a CERTIFICATE OF SALE in
exchange for the bid price he paid in order to REGISTER the
property for the redemption period to commence – which is ONE
YEAR from the date of the registration of the certificate of sale.

Litigation

a. REAL PROPERTIES
- In CASE OF REDEMPTION, the redemptioner must pay the BID
PRICE PLUS 12% per annum thereon; plus other legitimate
expenses like the fees for the registration of the certificate of
sale, taxes, documentation and notarial expenses. In a DECIDED
CASE however, redemption may not be allowed if there is an
UNPAID BALANCE in the adjudged amount against the defendant.

Litigation

b. PERSONAL PROPERTIES
It must be remembered substantially all personal or movable

properties except precious stones, metals and works of art
DEPRECIATE. This being the case, discretion and prudence
dictates that vigilance must at all times be exercised in
determining the reasonable value of the mortgaged property.

Litigation

When auctioning personal properties it must be borne in mind that:

- Its disposability is a major consideration
- The auction sale is a critical factor in order that the creditor
may recover as much as possible when disposing the personal
property
- It is not subject to redemption

Litigation

RANGE OF THE BID: 50%-70% of the reasonable market value which

must not be over the debt claimed specially if there are other
bidders participating in the auction sale.

Get help if you need it!
Email Address:
michaelribleza@yahoo.com
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Chapter 5: Legal Aspect

of Credit and Collection

The learners shall be able to

 explain the code of credit information exchange

College of Accountancy, Business and Governance

There are many legal and extra-legal remedies or

Knowing and understanding what extra-legal remedies or

College of Accountancy, Business and Governance

1. It is the necessary and logical thing to do

College of Accountancy, Business and Governance

1. Absence or lack of supporting documents

College of Accountancy, Business and Governance

2. Insufficient Documents – Try to complete or submit secondary

3. Signed by an Attorney-In-Fact – endeavor to check with the

4. Unregistered document – “Register” the documents as soon as

College of Accountancy, Business and Governance

5. Unnotarized document - have the document “notarized”. If there

6. Unknown debtor’s whereabouts – check with a third party with

7. Summons cannot be served – try the substituted service method of

College of Accountancy, Business and Governance

8. Debtor’s properties are substantially encumbered or disposed –

9. Debtor have filed for voluntary insolvency and/or suspension of

College of Accountancy, Business and Governance

10. Debtor’s business have been assigned/transferred or taken over

College of Accountancy, Business and Governance

1. Sending of proper demands to the party – obligor – debtors.

College of Accountancy, Business and Governance

6. Reply of the parties to the case: grounds for delay:

College of Accountancy, Business and Governance

Among the techniques by the Rules of Court are the following:

1. DISCOVERY - is the disclosure of facts, deeds, documents and

College of Accountancy, Business and Governance

I. DISCOVERY – the purpose of discovery is to enable the parties,

College of Accountancy, Business and Governance

College of Accountancy, Business and Governance

Depositions are generally taken due to the following:

College of Accountancy, Business and Governance

College of Accountancy, Business and Governance

College of Accountancy, Business and Governance

College of Accountancy, Business and Governance

College of Accountancy, Business and Governance

II. SUMMARY JUDGMENT – is a court decision upon a claim, counter

College of Accountancy, Business and Governance

III. JUDGMENT OF THE PLEADINGS– where the debtor/defendant

College of Accountancy, Business and Governance

IV. JUDGMENT ON DEMURRER TO EVIDENCE – It is a remedy availed of

College of Accountancy, Business and Governance

V. ALTERNATIVE DISPUTE RESOLUTION IN COURT/BUSINESS – The past

College of Accountancy, Business and Governance

VI. AMICABLE OR COMPROMISE AGREEMENT

1. Rationale or Motivation – a cliche among law practitioners state

College of Accountancy, Business and Governance

VI. AMICABLE OR COMPROMISE AGREEMENT

2. Tactics to motivate a defendant to enter into a compromise or

College of Accountancy, Business and Governance

VI. AMICABLE OR COMPROMISE AGREEMENT

2. Tactics to motivate a defendant to enter into a compromise or

College of Accountancy, Business and Governance

VI. AMICABLE OR COMPROMISE AGREEMENT

3. What to provide for in the compromise or amicable agreement:

College of Accountancy, Business and Governance

VI. AMICABLE OR COMPROMISE AGREEMENT