Heirs are not liable for their parents' debts

In the Philippines, the principle that heirs are not liable for their parents’ debts is a crucial aspect of inheritance law. This principle ensures that the financial obligations of a deceased person do not unduly burden their heirs. Let’s delve into the legal framework and provisions under the New Civil Code of the Philippines that govern this principle.

The Principle Explained

When a person passes away, their estate, which includes all their assets and liabilities, is subject to settlement. The estate is used to pay off any outstanding debts before any distribution to the heirs. However, if the estate is insufficient to cover the debts, the heirs are not personally liable to pay the remaining balance from their own pockets.

Key Provisions in the New Civil Code

The New Civil Code of the Philippines provides clear guidelines on this matter:

1. Article 774: Defines succession as the mode of acquisition by virtue of which the property, rights, and obligations to the extent of the value of the inheritance of a person are transmitted through his death to another or others.

2. Article 776: States that the inheritance includes all the property, rights, and obligations of a person which are not extinguished by his death.

3. Article 774: Emphasizes that the heirs are only liable to the extent of the value of the inheritance they receive. This means that if the inherited estate is insufficient to cover the debts, the heirs are not required to pay the excess from their personal assets.

4. Article 1311: Reinforces that contracts take effect only between the parties, their assigns, and heirs, except in cases where the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. This means that personal obligations of the deceased do not automatically transfer to the heirs.

Practical Implications

In practice, this means that if a parent leaves behind debts that exceed the value of their estate, the creditors can only claim up to the value of the estate. The heirs are protected from having to use their personal funds to settle these debts. This protection is vital for ensuring that the financial stability of the heirs is not compromised by the debts of the deceased.

Conclusion

The principle that heirs are not liable for their parents’ debts is a fundamental aspect of Philippine inheritance law. It ensures that the financial responsibilities of the deceased do not unfairly impact the heirs. The New Civil Code provides robust provisions to protect heirs, limiting their liability to the value of the inheritance they receive. This legal framework is essential for maintaining fairness and protecting the rights of heirs in the Philippines.

Source: The Manila Times and RALB Law

Ownership of mortgaged property does not pass to the creditor

The provision of Article 2088 of the New Civil Code, which states that:

"Art. 2088. 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."

Based on the above-stated law, a creditor is prohibited from appropriating or disposing of the thing pledged or mortgaged to him or her. Any stipulation to the contrary on this matter is considered as null and void because this arrangement is in the nature of a pactum commissorium, which is prohibited by our law.

Further, in the case of Annaliza Singson vs. Spouses Nar Christian and Cecilia Carpio (GR 238714, Aug. 30, 2023), the Supreme Court, through Chief Justice Alexander Gesmundo, held that "Art. 2088 of the New Civil Code provides that a creditor cannot appropriate or consolidate ownership over a mortgaged property merely upon failure of the mortgagor to pay a debt obligation. The essence of pactum commissorium is that ownership of the security will pass to the creditor by the mere default of the debtor.

Incidentally, the only right of a mortgagee, in case of nonpayment of debt secured by mortgage, would be to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. The mortgagor's default does not operate to automatically vest in the mortgagee the ownership of the encumbered property, for any such effect is against public policy."

To conclude a creditor is prohibited from appropriating the things given to him/her by way of mortgage, or from disposing of the same even if the mortgagor-owner defaults in payment of the debt owed to the creditor.

As the ownership of a mortgaged property is not transferred to the creditor upon the default of payment of the debt, the creditor may not sell the same.

World Bank sounds alarm on soaring borrowing costs

Governments across the globe were saddled in 2022 with surging cost of borrowing and some, especially the poorest ones, are facing the risk of debt crises as public obligations reach record levels amid high interest rates, according to the World Bank.

The multilateral lender came out with its latest International Debt Report on Dec. 13 even as global credit watchdog Fitch Ratings sees the Philippines debt profile improving, albeit slower than previously hoped for.

The World Bank found that, amid the biggest surge in global interest rates in four decades, developing countries spent a record $443.5 billion to service their external public and publicly guaranteed debt in 2022.

The result was that scarce resources were shifting away from critical needs such as health, education, and the environment.

Further, for all developing countries including the Philippines, debt-service payments that include principal and interest rose by 5 percent over the previous year.

World Bank chief economist Indermit Gill said in a statement that during every quarter when interest rates stay high, more developing countries become distressed and face the difficult choice of servicing their public debts or investing in public health, education, and infrastructure.

“The situation warrants quick and coordinated action by debtor governments, private and official creditors, and multilateral financial institutions—more transparency, better debt sustainability tools, and swifter restructuring arrangements,” Gill said. “The alternative is another lost decade.’’

International Debt Report 2023

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Philippines

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Source: Inquirer and Worldbank