Item Bought on Installment Was Repossessed: The Recto Law
Quick answer
If you bought an appliance, a motorcycle or another movable item from the seller on installment, and the seller forecloses the chattel mortgage on that item after you missed two or more installments, the seller can no longer sue you for the unpaid balance. This is Article 1484(3) of the Civil Code, part of the rules the Supreme Court calls the Recto Law. The seller must choose one remedy; it cannot take the item back through foreclosure and still collect the rest of the price.
What does the Recto Law say?
Article 1484 lists the seller's three remedies:
In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void.
The rule comes from Act No. 4122 of 1933. The Supreme Court refers to Articles 1484 to 1486 as the "Recto Law".
Can the seller use more than one remedy?
No. In Elisco Tool Manufacturing v. Court of Appeals (1999), the Court said: "The remedies provided for in Art. 1484 are alternative, not cumulative. The exercise of one bars the exercise of the others."
So a seller who chooses to foreclose the chattel mortgage on the item gives up the right to the unpaid balance. A seller who instead sues to collect the price uses remedy (1).
Does the rule apply to a "lease" with option to buy?
Yes, in some cases. Article 1485 says:
The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.
In PCI Leasing and Finance v. Giraffe-X Creative Imaging (2007), a "financial lease" of equipment was in reality a lease with an option to purchase. By taking back the equipment through replevin, the lessor waived its right to sue for the unpaid rentals. The Court noted that it had "long been aware of the practice of vendors of personal property of denominating a contract of sale on installment as one of lease".
What about the installments already paid?
Article 1486 allows the contract to say that the installments or rents paid will not be returned, but only "insofar as the same may not be unconscionable under the circumstances." Whether a clause like that is unconscionable is for the court to decide in each case.
Does the Recto Law cover bank financing?
Not when the bank is only the lender. In Equitable Savings Bank v. Palces (2016), the buyer bought a car from a third party and borrowed the full price from the bank, giving a chattel mortgage. The Court said there was "no vendor-vendee relationship" between the borrower and the bank, so applying Article 1484 was "misplaced". The bank could foreclose and had to return any excess from the sale.
That case was decided under the Chattel Mortgage Law (Act No. 1508). Republic Act No. 11057 (2018), the Personal Property Security Act, later repealed Sections 1 to 16 of that law. How foreclosure under Article 1484(3) works under the new law is not covered on this page.
How does this work in real life?
These are made-up examples to show how the rules work. They are not advice for any real case.
Joy buys a refrigerator from a store on installments and signs a chattel mortgage on it. She misses three installments, and the store forecloses the mortgage on the refrigerator. Under Article 1484(3), the store has no further action against Joy for the unpaid balance.
Rey instead borrows money from a bank to buy a motorcycle from a dealer. If he stops paying the bank, Palces suggests that Article 1484 does not protect him against the bank, because the bank did not sell him the motorcycle.
When do you need a lawyer?
Talk to a lawyer if an item you bought on installment was taken back and you are still being asked to pay the balance, if you are sued over an installment purchase, or before you sign a "lease" with option to buy. Whether the Recto Law applies depends on who sold the item, what the contract really is and which remedy the seller used.
If you cannot afford a lawyer, see Free legal help in the Philippines. For more on loans and collection, see Debt and collection.
Which provisions does this answer rest on?
Frequently asked questions
What is the Recto Law?
It is the name the Supreme Court uses for Articles 1484 to 1486 of the Civil Code, the rules on the sale of personal property, such as appliances, motorcycles and cars, payable in installments.
What can a seller do if the buyer stops paying the installments?
Article 1484 gives three remedies: demand payment, cancel the sale if the buyer failed to pay two or more installments, or foreclose the chattel mortgage on the thing sold, if there is one, also after two or more missed installments.
Can the seller repossess the item and still collect the balance?
Not if the seller forecloses the chattel mortgage on the item sold. Article 1484(3) says the seller then has no further action against the buyer to recover any unpaid balance of the price, and any agreement to the contrary is void.
Can the seller use all three remedies?
No. In Elisco Tool Manufacturing v. Court of Appeals (1999), the Supreme Court said the remedies are alternative, not cumulative: the exercise of one bars the exercise of the others.
Does the Recto Law apply to a lease with option to buy?
Yes, under Article 1485, when the lessor has taken the thing away from the lessee. In PCI Leasing and Finance v. Giraffe-X Creative Imaging (2007), the Court applied the rule to a so-called financial lease that was really a lease with an option to purchase.
Does the Recto Law apply to a car loan from a bank?
Not always. In Equitable Savings Bank v. Palces (2016), the buyer bought the car from a third party and borrowed the price from the bank. The Court held there was no seller and buyer relationship with the bank, so Article 1484 did not apply.
General information, not legal advice. For your case, ask a lawyer, the Public Attorney's Office (PAO) or the agency.
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