Point of Law

Francisco Ed. Lim

Good news for defaulting credit card holders

Francisco Ed. Lim

November 03, 2016

(Last of four parts)
If you are a credit card holder but find it difficult  to pay your credit card liabilities as they fall due, is it the end of the world for you?
Absolutely not.
Not known to everybody, the Financial Rehabilitation and Insolvency Act (FRIA) has a special remedy for debtors under this situation.
The original draft of this relatively recent law did not contain this special remedy but because of the increasing credit card transactions at the time it was being made, the law’s principal author, then Senator Edgardo J. Angara, deemed it wise to include it in anticipation of possible defaults by credit card holders. This mechanism was intended both for the protection of the banking industry and the consumers.
Suspension of payments
The remedy, known as suspension of payments,  is available to an individual debtor whose assets exceed his liabilities but foresees the impossibility of paying his debts as they fall due. It enables him to obtain a temporary reprieve from paying his maturing debts in the hope that he can come up with a mutually acceptable repayment plan with creditors under the supervision of the court.
So how can an individual debtor avail of this special remedy?
The debtor must file a petition with the regional trial court belonging to the area of jurisdiction where he has resided for at least six months.
If the court finds the petition sufficient in form and substance, it shall issue an order which, among others, generally prohibits the creditors from collecting their claims against the debtor during the proceedings. The order also appoints a commissioner whose main job is to convene and preside over creditors’ meetings meant to consider  and vote upon the repayment plan proposed by the debtor.
The order shall also direct the publication of the petition in a newspaper of general circulation in the Philippines so that any agreement that may be approved by the creditors and confirmed by the court will be binding on all.
For a meeting of creditors to be valid, it is necessary that creditors representing at least three-fifths of the debtor’s liabilities (not including those not affected  by the suspension order like secured creditors) are present.  All creditors (even those whose claims are not affected by the suspension order like secured creditors) may still attend the meeting.
At the meeting, the creditors shall consider the agreement proposed by the debtor.  If the proposal (as may be amended) is approved by two-thirds of creditors representing at least three-fifths of all creditors, the court shall issue an order confirming it. The agreement then becomes binding on all creditors even if they have not participated in the meeting or voted in its favor.
Rights of creditor
The remedy is not heavily in favor of the debtor. He must faithfully perform his obligations under the agreement. Otherwise, the court shall, upon  motion of any affected party, declare the agreement terminated, and all the rights which the creditors had against the debtor before the agreement shall be reverted back to them.
A big question that is being asked: is this special remedy available to individual debtors doing business as single proprietorships duly registered with the Department of Trade and Industry?
Some say it is not, as their  remedy is limited to rehabilitation which, undoubtedly, is available to businesses whether or not conducted by juridical entities or natural persons.  A resolution of the question is important because the procedure for rehabilitation is far more complex than the procedure for suspension of payments.
Well, let’s wait for the Supreme Court to decide on the issue at the appropriate time.