Debt-proof

From contented to tormented. From helpful to helpless. Almost from victor to victim. This is how it feels for many people who were approached for help by lending money.  How quick do tables turn when we become at the mercy of debtors, until all hope is lost to getting paid.

Blame it on circumstances, character of the debtor, or even blame it on our Constitution that says “No one shall be imprisoned for non-payment of debt.” A necessary complementary rule to the constitutional prohibition against involuntary servitude. That is, if a person has no property to pay you, you also cannot compel him to render a service.

Try filing a collection case against a debtor without assets and you would meet a person who is judgement proof. Beyond the reach of law and compulsion so it seems. We may not be enamored with financial institutions who lend only against collateral- until you get to be at the receiving end as creditor.  By then, you will appreciate that without collateral, you contribute what you lend.

There are practical ways to secure the debt you lend, and these are not unknown. For example, get an agreement to get paid directly by the employer of the debtor through salary deduction (this works easily if you have a common employer.) Or request for postdated checks. This secures your remedy to criminal prosecution if the checks bounce. If the debtors are in good faith about their commitment to pay, getting these basic securities, or even mortgages on properties should be non-issues. This also allows you to gauge the sincerity of the borrower, friend or foe.

Based on experience, the one thing a debtor respects is criminal action. A criminal case can produce results even when a debtor has no assets at the moment, as he is compelled to come up with an arrangement to pay from future earnings, or even from support from relatives who do not want to see him go to jail. No one can be imprisoned for non-payment of debt, true. However, they can be imprisoned for committing crimes: such as selling a personal property that they mortgaged while the debt is still unpaid, or the use of “deceit” to make the debtor part with the money. For example, if you have been deceived to believe that the debtor can pay as he has a lot of properties but he, in fact, has no intention to pay you, this can be a criminal act falling under estafa.

The Supreme Court had occasion to look at a usual modus operandi involving family members to keep property out of reach of creditors using the Torrens certificate of title system. In the case of Campos vs. Pastrana, spouses Campos was sued for money they owed. During the pendency of the case, they transferred title of the property to their children, before the creditors can levy them. The SC said they are transfers in fraud of creditors and the children are not buyers in good faith as they did not pay the full market value of the property. The spouses Campos also continue to possess the property. It was considered as a fake sale, and the creditors were allowed to attach the property. This is a civil case, but can be an example of facts that could have developed into a criminal case, especially if it is shown that there was no real intent to pay the debt contracted. In other words, it can be shown to be a scam.

Indeed the only other thing a debtor respects outside of criminal case is losing his properties. There is no issue that attachment can be secured on the assets of debtor, even on those he has already transferred if they were done in fraud of creditors. The question is, if the buyer is in good faith, is there legal basis to still attach the property in the hands of that buyer?

There is one relatively recent SC decision involving transfers between corporations, apparently done in good faith. In the case of Y-I Clubs and Resorts Inc. vs James Yu, what is really interesting is that the SC categorically stated in principle that even if the buyer is in good faith, the creditor of the seller can go after the properties sold if such properties represent all or substantially all the assets of the debtor. It is a decision not based on express law but based on equity, just so that the creditor will not be left without recourse.

The case overcomes good faith as a defense, it seems, as it is now the lookout of the buyer to exercise due diligence if the seller has unpaid liabilities to anyone. Even if the assets are clean of encumbrance when they were bought, they can still be attached in the hands of the buyer by a creditor which has no other recourse. Although the case involves sale between juridical persons, considering that it is principally based on fairness and equity, rather than on explicit law, I believe it can also apply to individual persons.

The brutal fact is, for many creditors, there is either a lack of effective legal recourse, or political will to go through all the trouble. In that case, the only advice I could give is to be convinced it will not materially affect your happiness, and of course, to resolve to be a victim, never again. That means to lend only what you can give, or secure what you will collect.

* * *

Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He also chairs the Educated Marginalized Entrepreneurs Resource Generation (EMERGE) program of the Management Association of the Philippines (MAP). Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.