Published 13 June 2018, The Daily Tribune

A loan is considered secured when it is coupled with an undertaking to pay by another person or when the debtor furnished the creditor with collateral property. When the obligation to pay  is solidary, the third person is called a surety, in which case, the creditor may enforce the payment of the loan  against any one of the debtor and the surety. The third person is called the guarantor if prior recourse to him is conditioned on the creditor’s exhaustion of the debtor’s assets  and all legal remedies against him. In other words, the surety is  jointly and severally liable with the creditor whereas the guarantor is subsidiarily liable.  When the collateral is personal property, chattel mortgage or pledge may be constituted on it. Real property, in turn, may be subjected to real estate mortgage. There are distinctions among the three security agreements as will be cited in future articles but the common denominator is that in case the debtor does not pay or violates any of the terms and conditions of the loan agreement ( or simply put, defaults ), the property offered as collateral may be sold and the proceeds thereof applied against his obligation.  If the collateral can not fetch a price equivalent to the debtor’s obligation, the creditor  may file an action to recover the deficiency.

The remedies avaiable to the mortgagee whether in a real or chattel mortgage agreement in case of  debtor’s default are pretty straightforward. He may either file an action for collection or foreclose the mortgage. However, in case the mortgagee resorts to collection suit, he is deemed to have given up his mortgage lien and stands in equal footing with the other creditors of the mortgagor. So, if the collection suit did not result in favorable outcome, the  mortgagee can no longer foreclose the mortgage. In fact, the mere fiing of the collection suit precludes the remedy of foreclosure.  The most efficient and practical remedy of the mortgagee is  to foreclose the mortgage first, and then sue for deficiency,  if the proceeds of the foreclosure sale are not enough to satisfy the loan.

The rights of the secured creditors are modified under FRIA. To recall, the invididual debtor may file a petition for suspension of payments or voluntary liquidation whereas an insolvent juridical debtor may file petition for rehabilitation or liquidation. Secured creditors are not affected by suspension of payment order. Thus, the mortgaged or pledged property may be sold and applied against the liabilities  of the defaulting debtor despite the suspension order. In liquidation proceedings, the right of the mortgagee to foreclose is suspended for a period of 180 days from issuance of the liquidation order. The liquidation order is the order that the court issues adjudicating the debtor as insolvent. Any foreclosure prior to the 180 day period is premature and may be lawfully set aside.

On the other hand, in rehabilitation proceedings, where the petition for rehabilitation is sufficient in form and substance, the court shall issue a commencement order, which includes a stay order. The start order enjoins the enforcement of claims against the debtor and its property. The stay order is in recognition of the “equality is equity “ principle in rehabilitation where all creditors, secured and unsecured, are in equal footing. Following this principle, secured creditors can not resort to foreclosure during the pendency of the rehabilitation proceeding. Does this inability to foreclose violate the non-impairment- of- contract clause under the Philippine Constitution ? It does not. The lien is not after all extinguished.  The exercise of the secured creditors’ right is simply deferred to give way to the rehabilitation of the debtor-which is supposed to benefit all the stakeholders- the creditors, debtor and the State. Besides, the police power of the State- manifested in the passage of laws to promote the general welfare- is superior to  the non-impairment-of- contract clause. The secured creditors will be allowed to enforce their lien once the rehabilitation proceedings are terminated. This may happen in case of failure of the rehabilitation plan, or the proceedings are converted to liquidation, if in the opinion of the court there is no likelihood that the debtor can be rehabilitated. Of course, the proceedings shall also be terminated  in case of successful implementation of the rehabilitation plan. By that time, all the creditors’ claims, secured or unsecured, shall have been likely settled.

Based on these parameters, the secured creditors need not feel insecured after all.