CREDIT TRANSACTIONS

DEFINITION
Credit Transactions include all transactions involving the
purchase or loan of goods, services, or money in the present
with a promise to pay or deliver in the future.

Credit transactions are really contracts of security. Secured

transactions or contracts of real security – those supported
by a collateral or an encumbrance of property; and Unsecured
transactions or contracts of personal security – Those the
fulfillment of which by the principal debtor is secured or
supported only by a promise to pay or the personal commitment
of another such as a guarantor or surety.
KINDS OF CREDIT TRANSACTIONS
1. Commodatum
2. Simple Loan or Mutuum
3. Deposit
4. Pledge
5. Real Estate Mortgage
6. Chattel Mortgage
7. Suretyship
8. Guaranty
9. Antichresis
COMMON TO PLEDGE AND
MORTGAGES
REQUISITES:
1. That they be constituted to secure the fulfillment of a
principal obligation;
2. That the pledgor or mortgagor be the absolute owner of
the thing pledged or mortgaged;
3. That the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence
thereof, that they be legally authorized for the purpose.
COMMON TO PLEDGE AND
MORTGAGES
THIRD PERSONS: who are not parties to the principal
obligation may secure the latter by pledging or mortgaging their
own property.

ACCESSORY CONTRACT: a pledge or mortgage, being an

accessory contract, cannot exist without a valid obligation or a
principal contract. Nevertheless, similar to a guaranty, a pledge
or a mortgage may be constituted to guaranty the performance
of a voidable or an unenforceable contract. It may also guaranty
a natural obligation.

The contract of pledge or mortgage may secure all kinds of

obligations, be they pure or subject to a suspensive or resolutory
condition
COMMON TO PLEDGE AND
MORTGAGES
PROHIBITION FOR AUTOMATIC APPROPRIATION: 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.

The stipulation is otherwise known as Pactum Commissorium.

INDIVISIBILITY
INDIVISIBILITY OF CONTRACT: A pledge or mortgage is
indivisible, even though the debt may be divided among the
successors in interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the pledge or
mortgage as long as the debt is not completely satisfied.

Neither can the creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid.

The indivisibility of a pledge or mortgage is not affected by the

fact that the debtors are not solidarily liable.
INDIVISIBILITY
ILLUSTRATION: D executed a contract of pledge in favor of C,
delivering his diamond ring and a gold watch, as security for his
loan amounting to P100,000. Without the debt being paid, C died
leaving X and Y, his sole heirs; D likewise died leaving A and B,
his sole heirs. A eventually made a payment to X representing his
share of the P100,000 debt owed by his father to X’s father.
Which of the following is true?
A. X can partially release either of the things pledge since his
share in the loan inherited from C has already been paid.
B. A can ask for the proportionate reduction extinguishment of
the pledge since A and B are not solidary debtors.
C. A can ask for the release of either the diamond ring or the
gold watch by virtue of his payment of his share in the loan.
D. The debt must completely be satisfied before any of the thing
pledge can be released
INDIVISIBILITY
ILLUSTRATION: D executed a contract of pledge in favor of C,
delivering his diamond ring and a gold watch, as security for his
loan amounting to P100,000. Without the debt being paid, C died
leaving X and Y, his sole heirs; D likewise died leaving A and B,
his sole heirs. A eventually made a payment to X representing his
share of the P100,000 debt owed by his father to X’s father.
Which of the following is true?
A. X can partially release either of the things pledge since his
share in the loan inherited from C has already been paid.
B. A can ask for the proportionate reduction extinguishment of
the pledge since A and B are not solidary debtors.
C. A can ask for the release of either the diamond ring or the
gold watch by virtue of his payment of his share in the loan.
D. The debt must completely be satisfied before any of
the thing pledge can be released
INDIVISIBILITY
Rule of Indivisibility NOT applicable: If there being several
things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment

of the pledge or mortgage as the portion of the debt, for which
each thing is specially answerable, is satisfied.
PLEDGE
PLEDGE is a contract by virtue of which the debtor delivers to
the creditor or to a third person movable (Art. 2094) or document
evidencing incorporeal rights (Art. 2095) for the purpose of
securing the fulfilment of a principal obligation with the
understanding that when the obligation is fulfilled, the thing
delivered shall be returned with all its fruits and accessions.
KINDS OF PLEDGE
1. Voluntary or conventional – created by agreement of the
parties; or
2. Legal – created by operation of law
CHARACTERISTICS OF A CONTRACT OF
PLEDGE
1. REAL – perfected by the delivery of the thing pledged;
2. ACCESSORY – no independent existence of its own;
3. UNILATERAL – creates an obligation solely on the part of
the creditor to return the thing;
4. SUBSIDIARY – obligation incurred does not arise until the
fulfilment of the principal obligation which is secured
CAUSE OR CONSIDERATION IN A
CONTRACT OF PLEDGE
1. Pledgor/debtor – the principal obligation;
2. Pledgor not the debtor – compensation stipulated or mere
liberality.
OBJECT OF A CONTRACT OF PLEDGE
1. Movable property;
2. Within the commerce of man and capable of possession;
3. Incorporeal rights, evidenced by negotiable instruments, bills
of lading, shares of stock, bonds, warehouse receipts and
similar documents may also be pledged. The instrument
proving the right pledged shall be delivered to the creditor,
and if negotiable, must be indorsed.
4. If the pledge earns or produces fruits, income, dividends, or
interests, the creditor shall compensate what he receives with
those which are owing him; but if none are owing him, or
insofar as the amount may exceed that which is due, he shall
apply it to the principal.
5. Unless there is a stipulation to the contrary, the pledge shall
extend to the interest and earnings of the right pledged.
OBJECT OF A CONTRACT OF PLEDGE
6. In case of a pledge of animals, their offspring shall pertain to
the pledgor or owner of animals pledged, but shall be subject
to the pledge, if there is no stipulation to the contrary.
7. Unless the thing pledged is expropriated, the debtor continues
to be the owner thereof.
8. Nevertheless, the creditor may bring the actions which pertain
to the owner of the thing pledged in order to recover it from,
or defend it against a third person.
LOSS, DETERIORATION OF PLEDGED
OBJECT OR THE FEAR THEREOF
1. If through the negligence or willful act of the pledgee, the thing
pledged is in danger of being lost or impaired, the pledgor may
require that it be deposited with a third person.
2. If there are reasonable grounds to fear the destruction or
impairment of the thing pledged, without the fault of the pledgee,
the pledgor may demand the return of the thing, upon offering
another thing in pledge, provided the latter is of the same kind as
the former and not of inferior quality, and without prejudice to the
right of the pledgee under the provisions of the following article.

The pledgee is bound to advise the pledgor, without delay, of any

danger to the thing pledged.
3. If, without the fault of the pledgee, there is danger of destruction,
impairment, or diminution in value of the thing pledged, he may
cause the same to be sold at a public sale. The proceeds of the
auction shall be a security for the principal obligation in the same
manner as the thing originally pledged.
FORM
There is no form required to constitute a contract of pledge, but
in order to affect third persons, there must be a public instrument
containing both the description of the thing pledged and the date
of the pledge.
ALIENATION OF THE THING PLEDGED
The alienation of the thing pledged is allowed with the consent of
the pledgee. The ownership of the thing pledged is transmitted to
the vendee or transferee as soon the pledgee consents to the
alienation, but the latter shall continue in possession.
CREDITOR-PLEDGEE
1. The creditor shall take care of the thing pledged with the diligence of
a good father of a family; he has a right to the reimbursement of the
expenses made for its preservation, and is liable for its loss or
deterioration, in conformity with the Civil Code.
2. The pledgee cannot deposit the thing pledged with a third person,
unless there is a stipulation authorizing him to do so.
3. The pledgee is responsible for the acts of his agents or employees
with respect to the thing pledged.
4. The creditor cannot use the thing pledged, without the authority of
the owner, and if he should do so, or should misuse the thing in any
other way, the owner may ask that it be judicially or extrajudicially
deposited. When the preservation of the thing pledged requires its
use, it must be used by the creditor but only for that purpose.
5. If the creditor is deceived on the substance or quality of the thing
pledged, he may either claim another thing in its stead, or demand
immediate payment of the principal obligation.
INSTANCES WHEN DEPOSIT OF THE
THING PLEDGED MAY BE HAD
1. As to the pledgee - if there is stipulation authorizing him to do
so;
2. As to the pledgor
a. If the pledgee uses or misuses the thing pledged
b. If the thing pledged is in danger of being lost or impaired
through the negligence or willful act of the pledgee.
PLEDGOR
1. The pledgor who, knowing the flaws of the thing pledged,
does not advise the pledgee of the same, shall be liable to the
latter for the damages which he may suffer by reason thereof.
2. The debtor cannot ask for the return of the thing pledged
against the will of the creditor, unless and until he has paid
the debt and its interest, with expenses in a proper case.
RETURN OF THE THING PLEDGED
If the thing pledged is returned by the pledgee to the pledgor or
owner, the pledge is extinguished. Any stipulation to the contrary
shall be void.

If subsequent to the perfection of the pledge, the thing is in the

possession of the pledgor or owner, there is a prima facie
presumption that the same has been returned by the pledgee.
This same presumption exists if the thing pledged is in the
possession of a third person who has received it from the pledgor
or owner after the constitution of the pledge.
RENUNCIATION OR ABANDONMENT
OF PLEDGE
A statement in writing by the pledgee that he renounces or
abandons the pledge is sufficient to extinguish the pledge. For
this purpose, neither the acceptance by the pledgor or owner, nor
the return of the thing pledged is necessary, the pledgee
becoming a depositary.
FORECLOSURE SALE
1. The creditor to whom the credit has not been satisfied in due
time, may proceed before a Notary Public to the sale of the
thing pledged.
2. This sale shall be made at a public auction, and
3. With notification to the debtor and the owner of the thing
pledged in a proper case, stating the amount for which the
public sale is to be held.
4. If at the first auction the thing is not sold, a second one with
the same formalities shall be held; and if at the second
auction there is no sale either, the creditor may appropriate
the thing pledged.

In this case he shall be obliged to give an acquittance for his

entire claim.
FORECLOSURE SALE
5. At the public auction, the pledgor or owner may bid. He shall,
moreover, have a better right if he should offer the same
terms as the highest bidder.

The pledgee may also bid, but his offer shall not be valid if he
is the only bidder.

All bids at the public auction shall offer to pay the purchase
price at once. If any other bid is accepted, the pledgee is
deemed to have received the purchase price, as far as the
pledgor or owner is concerned.
FORECLOSURE SALE
6. Proceeds:
a. The sale of the thing pledged shall extinguish the principal
obligation, whether or not the proceeds of the sale are
equal to the amount of the principal obligation, interest
and expenses in a proper case.
b. If the price of the sale is more than said amount, the
debtor shall not be entitled to the excess, unless it is
otherwise agreed.
c. If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency, notwithstanding any
stipulation to the contrary
OTHER RULES ON PLEDGE
1. After the public auction, the pledgee shall promptly advise the
pledgor or owner of the result thereof.
2. Any third person who has any right in or to the thing pledged
may satisfy the principal obligation as soon as the latter
becomes due and demandable.
3. If a credit which has been pledged becomes due before it is
redeemed, the pledgee may collect and receive the amount
due. He shall apply the same to the payment of his claim, and
deliver the surplus, should there be any, to the pledgor.
4. If two or more things are pledged, the pledgee may choose
which he will cause to be sold, unless there is a stipulation to
the contrary. He may demand the sale of only as many of the
things as are necessary for the payment of the debt.
OTHER RULES ON PLEDGE
5. If a third party secures an obligation by pledging his own
movable property, he shall have the same rights as a
guarantor to be:
a. Indemnified for the total amount of the debt, including
interest, expenses or damages, if they are due;
b. Subrogated to all the rights the creditor had against the
debtor;
c. He is not prejudiced by any waiver of defense by the
principal obligor.
7. With regard to pawnshops and other establishments, which
are engaged in making loans secured by pledges, the special
laws and regulations concerning them shall be observed, and
subsidiarily, the provisions of this Title.
LEGAL PLEDGE
1. Pledges created by operation of law, such as those referred
to in Articles 546, 1731, and 1994, are governed by the
articles on the possession, care and sale of the thing as well
as on the termination of the pledge. However, after payment
of the debt and expenses, the remainder of the price of the
sale shall be delivered to the obligor.
2. A thing under a pledge by operation of law may be sold only
after demand of the amount for which the thing is retained.
The public auction shall take place within one month after
such demand. If, without just grounds, the creditor does not
cause the public sale to be held within such period, the
debtor may require the return of the thing.
REAL ESTATE MORTGAGE
OBJECT: Only the following property may be the object of a
contract of mortgage:
1. Immovables;
2. Alienable real rights in accordance with the laws, imposed
upon immovables.

Nevertheless, movables may be the object of a chattel mortgage

FORM: there is no form required to constitute a contract of real

estate mortgage, but in order to affect third persons, there must
be a public instrument containing the description thereof and the
same should be recorded in the Registry of Property.

The creditor-mortgagee has no other right than to demand the

execution and the recording of the document in which the
mortgage is formalized.
REAL ESTATE MORTGAGE
EXTENT: The mortgage extends to the natural accessions, to
the improvements, growing fruits, and the rents or income not
yet received when the obligation becomes due, and to the
amount of the indemnity granted or owing to the proprietor from
the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains in
the possession of the mortgagor, or it passes into the hands of a
third person.

MORTGAGE CREDIT IS TRANSFERABLE: The mortgage

credit may be alienated or assigned to a third person, in whole or
in part, with the formalities required by law.
REAL ESTATE MORTGAGE
PACTUM DE NON-ALIENDO: the owner is allowed to alienate
the immovable property mortgaged. A stipulation
prohibiting/forbidding such right is called pactum de non-aliendo
and is considered void.

THIRD PARTY TRANSFEREE: Buyers or transferees of the

property mortgaged are not affected by an unregistered
mortgage. However, if the mortgage is registered (Art. 1312)
they are
1. Bound by a foreclosure sale on the property
2. Not bound to answer the deficiency
3. Unless there is novation in the person of the debtor

DELIVERY: is not required. The possession of the real property

remains with the mortgagor.
REAL ESTATE MORTGAGE
FORECLOSURE: can either be judicial or extra-judicial.
JUDICIAL
With court intervention
May be availed in any real
estate mortgage
Rule 68, Rules of Court
Judicial posting in 3 public
places 20 days prior to sale
and publication of notice of
sale in a newspaper of
general circulation
EXTRA-JUDICIAL
No court intervention
May be availed only if there is
stipulation granting the right to
extra-judicially foreclose
Act No. 3135
Generally no notice to the
mortgagor is required, unless
such right to notice is granted
by stipulation
REAL ESTATE MORTGAGE
JUDICIAL
Equity of Redemption is until
the court issues an order of
confirmation of the sale
EXTRA-JUDICIAL
Redemption period is generally 1
year. Except if the mortgagor is
a juridical person and the
mortgagee is a bank, in which
case the redemption period is
until the registration of the
foreclosure sale, not exceeding
3 months
REAL ESTATE MORTGAGE
PROCEEDS IN A FORECLOSURE SALE:
1. If the proceeds are higher than the amount of indebtedness –
the mortgagor is entitled to the excess.
2. If the proceeds are less than the amount of indebtedness –
the mortgagee is entitled to the deficiency, except if the
mortgagor is a third person.
CHATTEL MORTGAGE
In a chattel mortgage, the personal property is recorded in the
Chattel Mortgage Register as a security for the performance of
an obligation.

If the movable, instead of being recorded, is delivered to the

creditor or a third person, the contract is a pledge and not a
chattel mortgage.
CHATTEL MORTGAGE
COVERAGE: debts/obligations indicated in the Affidavit of Good
Faith unless there is stipulation as to increase in coverage which
will be binding but the security itself arises only after amending
the old contract.

DISPOSAL OF THE THING MORTGAGED PROHIBITED:

Mortgagor-owner cannot sell the property mortgaged otherwise
he can be criminally liable under Art. 319 of the RPC: Removal of
Mortgaged Property.

FORECLOSURE: is extrajudicial and requires notice and posting

in two or more public places 10 days prior to the sale.
CHATTEL MORTGAGE
PROCEEDS OF FORECLOSURE SALE:
1. If the proceeds are more than the obligation due – the
mortgagor is entitled to the excess.
2. If the proceeds are less than the obligation due – the
mortgagee is generally entitled to the deficiency, except if the
transaction is covered by the Recto Law.
 DISTINCTION BETWEEN PLEDGE, REAL
ESTATE MORTGAGE AND CHATTEL
MORTGAGE
PLEDGE REAL ESTATE MORTGAGE CHATTEL
MORTGAGE
Object Personal property Real property but extends to Personal property
susceptible of the natural accessions, subject thereof
possession improvements, growing fruits,
including and the rents or income not
incorporeal rights yet received when the
obligation becomes due, and
to the amount of indemnity
from insurance or from
expropriation

And may include after acquired

properties as per stipulation.
 DISTINCTION BETWEEN PLEDGE, REAL
ESTATE MORTGAGE AND CHATTEL
MORTGAGE
PLEDGE REAL ESTATE CHATTEL MORTGAGE
MORTGAGE
Perfection Delivery Consensual but Consensual
covered by the
Public statute of frauds Affidavit of Good Faith* registered
instrument in the Chattel Mortgage Registry in
required to bind Public instrument the Registry of Deeds required to
third parties that is registered bind third parties
in the Registry of
deeds is required For vessels – registration is with the
to bind third MARINA
parties
For motor vehicles - + report to the
LTO
 DISTINCTION BETWEEN PLEDGE, REAL
ESTATE MORTGAGE AND CHATTEL
MORTGAGE
PLEDGE REAL ESTATE CHATTEL
MORTGAGE MORTGAGE
Possession Transferred to the Retained by the Retained by the
pledgee mortgagor mortgagor
Principal That which is Generally, covers only Those indicated in the
obligation existing at the time that which is stated in Affidavit of Good Faith
covered of the pledge the deed even if less unless there is
than the amount of stipulation as to
loan. Exception: if increase in coverage
there is stipulation to which will be binding
cover future but the security itself
advancements. arises only after
amending the old
contract.
 DISTINCTION BETWEEN PLEDGE, REAL
ESTATE MORTGAGE AND CHATTEL
MORTGAGE
PLEDGE REAL ESTATE CHATTEL MORTGAGE
MORTGAGE
Sale of the Valid as long as Valid – any Mortgagor-owner cannot
thing with consent of stipulation to the sell the property
during the the contrary is void. mortgaged otherwise he
pendency creditor/pledgee can be criminally liable
of the who shall under Art. 319 of the RPC:
contract continue in Removal of Mortgaged
possession even if Property
the ownership is
transferred to the
buyer
 DISTINCTION BETWEEN PLEDGE, REAL
ESTATE MORTGAGE AND CHATTEL
MORTGAGE
PLEDGE REAL ESTATE CHATTEL MORTGAGE
MORTGAGE
Sale of the Done by notary Extrajudicial (Act Extrajudicial (Act No. 1508)
thing to public – public No. 3135) or judicial
answer for auction – always (Rule 68)
the debt extrajudicial – no
intervention of
the courts.
 DISTINCTION BETWEEN PLEDGE, REAL
ESTATE MORTGAGE AND CHATTEL
MORTGAGE
PLEDGE REAL ESTATE CHATTEL
MORTGAGE MORTGAGE
Notice of Required – stating Extrajudicial – not Required 10 days
sale to the the amount due required, unless prior to sale
mortgagor stipulated.
/pledgor Posting in two or
Judicial Posting in 3 more public places 10
public places at least 20 days before auction
days prior to sale and
publication of the notice
of sale in a newspaper of
general circulation
 DISTINCTION BETWEEN PLEDGE, REAL
ESTATE MORTGAGE AND CHATTEL
MORTGAGE
PLEDGE REAL ESTATE CHATTEL
MORTGAGE MORTGAGE
Creditor’s The creditor is Creditor is not Creditor is not entitled
right to entitled to the entitled to the excess to the excess
excess of excess unless
selling price there is stipulation
over unpaid to the contrary
obligation
Creditor’s The creditor is Creditor can recover Creditor can recover
right to NOT entitled to deficiency except if deficiency unless the
recover recover any the mortgagor is a sale is covered by the
deficiency deficiency third person (unless RECTO LAW (i.e., sale
there is stipulation of personal property on
making him liable) installment)
 DISTINCTION BETWEEN PLEDGE, REAL
ESTATE MORTGAGE AND CHATTEL
MORTGAGE
PLEDGE REAL ESTATE MORTGAGE CHATTEL
MORTGAGE
Redemption No right of EXTRAJUDICIAL FORECLOSURE: No right of
redemption 1 year from date of foreclosure, except: redemption after
foreclosure sale.
1. Creditor is a bank
2. Debtor is a juridical person If the condition of the
mortgage is broken,
In which case the redemption period is redemption may be
until the registration of the foreclosure made by:
sale, not exceeding 3 months. 1. the mortgagor;
2. person holding
JUDICIAL FORECLOSURE: subsequent
Equity of redemption is until the mortgage;
confirmation of sale by the court 3. a subsequent
attaching creditor.
END