Can a Lender Keep Your Collateral If You Do Not Pay?
Quick answer
Not automatically. Under Article 2088 of the Civil Code, a lender holding a pledge or mortgage cannot simply take the property for himself when the borrower fails to pay; a clause that says he can is void. This forbidden clause is called pactum commissorium. In the Supreme Court cases on mortgaged land, the lender's remedy was to foreclose and have the property sold to pay the debt. Movable collateral is now governed by a newer law with its own procedure.
What does the Civil Code say?
Two articles of the Civil Code state the rule for pledges and mortgages:
It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor.
The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.
So the property may be sold to pay the debt, but the creditor may not just keep it.
What is pactum commissorium?
In Spouses Ong v. Roban Lending (2008), the Supreme Court listed its two elements: "(1) there should be a property mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period."
Consent does not save it. The Court said: "That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no moment, pactum commissorium being void for being prohibited by law."
In Singson v. Spouses Carpio (2023), the Court summed it up: "The essence of pactum commissorium is that ownership of the security will pass to the creditor by the mere default of the debtor." The mortgagee's only right on nonpayment "would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness."
Does it need an express clause?
Not always. In Eupena v. Bobier (2020), a lender had the borrower's land titled in her own name and then leased it back to the borrower. The Court held that the lease was "the result of a pactum commissorium" and invalid under Article 2088, so the lender's ejectment case failed.
Deeds of sale used to hide loans are treated in the same spirit. A sale with right to repurchase may be presumed an equitable mortgage under Article 1602; see Sale with right to repurchase.
When can the lender lawfully get the property?
Through foreclosure, as the cases above say. Also, the prohibition has a limit. In Ruby Shelter Builders v. Tan (2024), the Court said: "The prohibition does not extend to a mutual agreement between the debtor and the creditor that the property subject of the mortgage is sold to the latter to extinguish the obligation." There, the debtor company itself offered its properties in payment (dacion en pago), and the transfer was upheld.
What about movable collateral, like a car or equipment?
Republic Act No. 11057, the Personal Property Security Act (2018), applies to transactions that secure an obligation with movable collateral. Section 66(b) lists Articles 2085 to 2123 of the Civil Code among the provisions "repealed, amended, or modified accordingly" insofar as they are inconsistent with the Act. Section 54 lets a secured creditor, after default, "propose to the debtor and grantor to take all or part of the collateral in total or partial satisfaction of the secured obligation". For full satisfaction, the creditor may keep the collateral unless it receives a written objection within twenty days after the proposal is sent; for partial satisfaction, only with the written consent of each person who received the proposal within twenty days. Section 68 ties the Act's implementation to the setting up of its registry.
The land cases above decided from 2020 to 2024 involved facts from before 2018 and applied Article 2088 without discussing Republic Act No. 11057. No case was read on how Section 54 is applied.
How does this work in real life?
This is a made-up example to show how the rules work. It is not advice for any real case.
Carla borrows money and mortgages her lot as security. The contract says the lot becomes the lender's if she does not pay within one year. She cannot pay, and the lender has the title transferred to his name without foreclosure. Under Article 2088 and the rulings in Ong and Singson, the clause and the transfer are void; the lender may collect the loan or foreclose.
If instead Carla, after defaulting, freely agrees with the lender to sell him the lot to settle the debt, Ruby Shelter suggests the deal can be valid.
See also the meaning of pactum commissorium.
When do you need a lawyer?
Talk to a lawyer before you sign a loan with collateral, if a lender says your property is now his because you did not pay, or if a title was transferred without foreclosure. Whether a deal is void depends on the documents and what happened after default.
If you cannot afford a lawyer, see Free legal help in the Philippines. For more on loans, see Debt and collection and equitable mortgage.
Which provisions does this answer rest on?
Frequently asked questions
Can a lender take my mortgaged land if I do not pay?
Not automatically. Article 2088 of the Civil Code says the creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them, and any stipulation to the contrary is void. In the land cases read, the lender's remedy was to foreclose.
What is pactum commissorium?
In Spouses Ong v. Roban Lending (2008), the Supreme Court said its elements are a property mortgaged as security for a debt, and a stipulation for automatic appropriation by the creditor of the property if the debt is not paid on time. Such a stipulation is void.
Is it valid if I agreed to it?
No. In Ong, the Court said it does not matter that the contracts were freely and voluntarily signed, since pactum commissorium is void for being prohibited by law.
Can I choose to give the property to the lender to settle the loan?
In Ruby Shelter Builders v. Tan (2024), the Court said the prohibition does not extend to a mutual agreement that the mortgaged property is sold to the creditor to extinguish the debt. There, the debtor itself had offered the properties in payment, and the transfer was valid.
What if the lender had the title transferred to his name?
In Singson v. Spouses Carpio (2023), a transfer of title to the lenders without foreclosure was held to be pactum commissorium; the new title was cancelled and the old one restored, subject to the lenders' right to foreclose.
Does the same rule apply to movable collateral, like a car?
Movable collateral is now covered by Republic Act No. 11057, the Personal Property Security Act (2018). Its Section 54 has its own procedure for a secured creditor who wants to keep the collateral after default: a proposal sent to the debtor and others, and a 20-day period to object in writing.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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