lOMoARcPSD|25441420
Credit Transaction - Lecture
Accountancy (Colegio de Dagupan)
Studocu is not sponsored or endorsed by any college or university
Downloaded by Mylene Bendijo (mbendijo15@gmail.com)
lOMoARcPSD|25441420
UNIVERSIDAD DE DAGUPAN
NOTES ON CREDIT TRANSACTIONS
debtor be the owner of thing pledged or
mortgaged. Third persons may pledge or
mortgage their property to secure another
person’s debt. However, they can be held
liable only to the extent of the value of
their property. With respect to mortgage,
they may be held liable for any deficiency
in case of foreclosure if they expressly
agreed to assume the principal obligation.
COVERAGE
1.5 Credit Transactions
1.5.1 Pledge, Real Mortgage and
Chattel Mortgage
1.5.1.1 Similarities
1.5.1.2 Requisites
1.5.1.3 Indivisibility
1.5.1.4 Pactum Commissorium
1.5.1.5
Third
party
pledgors/mortgagors
1.5.2 Requirements to bind the parties and
third persons
1.5.3 Obligations and rights of pledgor and
pledgee
1.5.4 Obligations and rights of mortgagor and
mortgagee
1.5.5 Modes of extinguishment
(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.
Third persons who are not parties to the
principal obligation may secure the latter by
pledging or mortgaging their own property.
(1857)
PACTUM COMMISSORIUM
CREDIT TRANSACTIONS
 Includes all transactions involving the
purchase or loan of goods, services, money
in the present with a promise to pay or
deliver in the future.
 Bailment contracts, contracts of guaranty
and suretyship, mortgage, antichresis,
and concurrence
and preference of
credits.
PROVISIONS COMMON TO
PLEDGE AND MORTGAGE
(SIMILARITIES & REQUISITES)
PACTUM COMISSORIUM – is an agreement
whereby the creditor automatically becomes
the owner of the thing given by way of pledge
or mortgage or dispose of them in case of nonpayment.
 It is a stipulation which enables the
mortgage or pledgee to acquire ownership
of the pledged or mortgaged property
without the need of any foreclosure
proceeding or public auction.
 Pactum Commissorium is null and void
(Art.2088).
INDIVISIBILITY
Art. 2085. The following requisites are
essential to the contracts of pledge and
mortgage:
(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;
 Third persons may pledge or mortgage
their property – It is NOT required for the
validity of a pledge or mortgage that the
As a rule, 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. This rule applies even if the
debtors are jointly liable. (Art. 2089)
Exception: The pledge or mortgage is divisible
if several things are given in pledge or
mortgage and each one of them guarantees
only a determinate portion of the credit.
Example:
Page 1 of 7
Downloaded by Mylene Bendijo (mbendijo15@gmail.com)
lOMoARcPSD|25441420
UNIVERSIDAD DE DAGUPAN
NOTES ON CREDIT TRANSACTIONS
A borrowed from B P 10,000 and to guarantee
payment, A pledge his diamond ring worth P
4,000 and a pair of earnings worth P 6,000. If A
pays P 4,000, he cannot ask for the return of
the ring because both the ring and the earnings
are given to secure payment of the entire
obligation of P 10,000.
PLEDGE
(Art. 2093 – 2123)
PLEDGE – is an accessory, real and unilateral
contract by virtue of which the debtor or a
third person delivers to the creditor or to a
third person movable property as security for
the performance of the principal obligation,
upon fulfillment of which the thing pledged,
with all its accessions and accessories shall be
returned to the debtor or the third person.
Kinds of pledge:
Voluntary or conventional – one which is
created by agreement of the parties; or
Legal – one which is created by operation of
law (Art 2121)
Note: A pledge shall not take effect against
third persons if a description of the thing
pledged and the date of the pledge do not
appear in a public instrument. (Art. 2096)
RULES IN POSSESSION
1. The pledgee has the right to retain the
thing until the debt is paid;
2. The pledgor cannot alienate the thing
pledged before the obligation becomes
due unless there is consent on the part of
the pledgee – ownership of the thing
pledged is transferred to the vendee or
transferee as soon as the pledgee consents
to the alienation but the latter shall
continue in possession;
3. The creditor-pledgee shall take care of the
thing pledged with the diligence of a good
father of a family; he has a right of
reimbursement of the expenses made for
its preservation and is liable for its loss or
deterioration;
4. The pledgee cannot deposit the thing
pledged with a third person, unless there is
a stipulation authorizing him to do so;
5. 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.
Except: If the preservation of the thing
pledged requires its use it must be used by
the creditor but only for that purpose.
PUBLIC AUCTION
PUBLIC AUCTION – 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.
The sale shall be made:
a. Made at a public auction;
b. With notification to the debtor and the
owner of the thing pledged in a proper
case;
c. The notice must state the date for which
the public sale is to be made;
d. If at the first auction sale 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 creditor shall be
obliged to give an acquitance for his entire
claim;
e. At the public auction, the pledgor or the
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;
f. The pledgor or owner has no right to
redeem the property after the public
auction. However, there is equity of
redemption, that is the pledgor or owner
may satisfy the obligation after it becomes
due and before the public sale.
Page 2 of 7
Downloaded by Mylene Bendijo (mbendijo15@gmail.com)
lOMoARcPSD|25441420
UNIVERSIDAD DE DAGUPAN
NOTES ON CREDIT TRANSACTIONS
RULES ON DEFICIENCY AND EXCESS
1. Deficiency cannot be recovered – the sale
of the thing pledged shall extinguish the
principal obligation, whether or not
proceeds of the auction sale are equal to
the amount of the principal obligation,
interest and expenses in a proper case. The
creditor is not entitled to recover the
deficiency even if there is a stipulation to
the contrary;
2. Excess belongs to the creditor-pledgee – if
the price of the sale is more than the
amount of the obligation, the debtor shall
not be entitled to the excess.
Exceptions:
1. If it is otherwise agreed;
2. In legal pledge or pledge by
operation of law, after payment of the debt
and expenses, the remainder of the price of
the sale shall be delivered to the obligor.
EXTINGUISHMENT OF PLEDGE
a. Return of the thing pledged by the pledgee
to the pledgor or owner, any stipulation to
the contrary being void (Art 2110);
b. Renunciation or abandonment executed in
writing by the pledgee even without return
of the thing (Art 2111);
principal obligation, it is an encumbrance on
real property.
 Only security interest is acquired, the right
to possession is not included unless
otherwise stipulated.
 Future obligations may be covered by REM
if the same is expressly provided; in the
absence of stipulation, the general rule is
that the mortgage must be limited to the
amount mentioned in the mortgage.
 Registration – a real estate mortgage must
be registered with the Registry of Deeds
where the subject property is located in
order to affect third persons. However, an
unregistered mortgage is valid between
the parties.
FORECLOSURE
Foreclosure is the remedy available to the
mortgagee by which he subjects the property
mortgaged to the satisfaction of the obligation
secured;
Grounds for foreclosure:
1. When the principal obligation is not paid
when due;
2. When there is any violation of any
condition, stipulation or warranty by the
mortgagor.
c. Destruction or loss of the thing pledged;
KINDS OF FORECLOSURE
d. Extinction of the principal obligation (by
payment or sale of the thing pledged); and
e. Other causes of extinguishments or
ordinary obligations (Art 1231)
REAL ESTATE MORTGAGE
(Art. 2124 – 2131)
REAL ESTATE MORTGAGE – is a contract
embodied in a public instrument recorded in
the Registry of Property in which the debtor
guarantees to the creditor the fulfillment of a
1. JUDICIAL FORECLOSURE – a foreclosure
made through the filing of a petition in
court.
a. If the defendant fails to pay the
amount due within the time directed
by the court, the property shall be
sold;
b. Deficiency judgment – if the proceeds
of the sale are not sufficient to satisfy
the claim of the creditor, the court,
upon motion, shall render the
judgment against the debtor, for such
balance.
Page 3 of 7
Downloaded by Mylene Bendijo (mbendijo15@gmail.com)
lOMoARcPSD|25441420
UNIVERSIDAD DE DAGUPAN
NOTES ON CREDIT TRANSACTIONS
2. EXTRAJUDICIAL FORECLOSURE – this is
made in compliance with the provision of Act
No. 3135 in the following cases:
a. Where there is a stipulation in the
mortgage contract that the mortgage
may be foreclosed extra-judicially ; or
b. Where such extra-judicial foreclosure
sale is made under a special power of
attorney inserted in the contract.
CHATTEL MORTGAGE
(Art. 2140 – 2141)
CHATTEL MORTGAGE – It is an accessory
contract by virtue of which personal property
is recorded in the Chattel Mortgage Registry as
security for the performance of an obligation.
REDEMPTION
 It covers personal or movable properties
including incorporeal properties, shares of
stocks and interests in business.
REDEMPTION – a transaction through which
the mortgagor, or one claiming in his right, by
means of payment or the performance of the
condition, acquires or buys back the value of
the title which may have passed under the
mortgage.
 A chattel mortgage can cover only
obligations existing at the time the
mortgage is constituted. It cannot cover
after incurred obligations.
REQUIRED FORMALITIES IN
CHATTEL MORTGAGE
Kinds of Redemption:
1. EQUITY OF REDEMPTION – this refers to
the right of the mortgagor to redeem the
mortgaged property after his default in the
performance of his obligation but before
the property is sold. This is available only in
judicial foreclosure of REM, the mortgagor
is given not less than 90 days to pay the
mortgage debt before the property is sold.
2. RIGHT OF REDEMPTION – this refers to the
right of the mortgagor to repurchase the
property within a certain period after it
was sold for the payment of the mortgage
debt.
a. In judicial foreclosure, the mortgagor
may redeem the property after the
sale and before the confirmation by
the court of the sale.
b. In extrajudicial foreclosure, the
mortgagor has one year from the date
of registration of the sale to redeem
the property.
Exception: If the owner of the property is
juridical person, the right of redemption may
be exercised until the registration of the
certificate of foreclosure sale with the Registry
of Deeds which in no case shall be more than 3
months after foreclosure, whichever is earlier.
1. CM must be registered in the Chattel
Mortgage registry of the Registry of Deeds
where the mortgagor resides or if he
resides outside the Philippines, in the place
where the property is situated. An
unregistered mortgage is binding between
the parties but not on third persons;
2. Affidavit of good faith – a document
executed by the parties attesting that the
loan on which the personal property
secured is entered into in good faith.
RIGHT OF REDEMPTION AND
DEFICIENCY AFTER FORECLOSURE
1. RIGHT OF REDEMPTION – there is no right
of redemption after the foreclosure sale;
there is only equity of redemption before
the foreclosure sale – mortgagor is given
not less than 90 days to pay the mortgage
debt before the property is sold.
2. DEFICIENCY AFTER FORECLOSURE – after
foreclosure, the mortgagee may generally
recover any deficiency that may result
Page 4 of 7
Downloaded by Mylene Bendijo (mbendijo15@gmail.com)
lOMoARcPSD|25441420
UNIVERSIDAD DE DAGUPAN
NOTES ON CREDIT TRANSACTIONS
after applying the proceeds of the
foreclosure sale to the obligation.
Exception: When the transaction
secured is sale of personal property on
installment basis under the Recto Law.
EXERCISES
1. The following are provisions common to
pledge and mortgage, except:
A. That they be constituted to secure the
fulfillment of a principal obligation;
B. That the pledgor or mortgagor be the
absolute owner of the thing pledged or
mortgaged;
C. 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;
D. Third persons who are not parties to
the principal obligation may not secure
the latter by pledging or mortgaging
their own property.
2. Is an agreement whereby the creditor
automatically becomes the owner of the
thing given by way of pledge or mortgage
or dispose of them in case of non-payment.
A. Dacion en pago
B. Pactum Comissorium
C. Contract to sell
D. Contract of sale
3. A, creditor, entered into an agreement
with B, debtor, whereby A automatically
becomes the owner of the Ring pledged by
B in case of non-payment of the principal
obligation. Said agreement is
A. Valid
B. Voidable
C. Unenforceable
D. Void
4. A borrowed from B P 20,000 and to
guarantee payment, A pledge his diamond
ring worth P 15,000 and a pair of earnings
worth P 5,000. If A pays P 15,000, he
A. cannot ask for the return of the ring
because both the ring and the earnings are
given to secure payment of the entire
obligation
B. can ask for the return of the ring because
it is of the same value of the amount he
paid
C. can ask for the return of either the ring or
the earrings, because the amount paid is
sufficient to cover either of the pledged
item
D. Any of the answers
5. A contract of pledge is not effective
between the contracting parties until
A. The notarization of the contract
B. Actual delivery of the thing pledged to
the creditor or to a third person by
common agreement
C. Constructive delivery of the thing
pledged
D. The contracting parties come to an
agreement
6. A contract of pledge is not effective against
third persons until the following appears in
the public instrument
A. Description of the thing pledged and
date of pledge
B. Description of the thing pledge only
C. Date of pledge only
D. Amount of loan secured
7. The pledgor may alienate the thing
pledged provided
A. The pledgee consents to the sale
B. The owner consents to the sale
C. The loan has been fully paid
D. The price is not less than the amount
of the loan
8. What is an obligation of the pledgor?
A. To demand the return of the ring
before full payment of the debt,
including interest due thereon and
expenses incurred for its preservation
B. To advise the pledgee of the flaws of
the thing
C. To take care of the thing with the
diligence of a good father of a family
and be liable for the loss or
deterioration of such
Page 5 of 7
Downloaded by Mylene Bendijo (mbendijo15@gmail.com)
lOMoARcPSD|25441420
UNIVERSIDAD DE DAGUPAN
NOTES ON CREDIT TRANSACTIONS
D. Responsibility for acts of agent and
employees as regards the thing
9. How many auction/s should fail before the
pledgee can appropriate the thing pledged
for himself?
A. 1
B. 2
C. 3
D. 4
10. If the price of the sale of the thing pledged
is more than the obligation due, who is
entitled to the excess?
A. Debtor, unless it is otherwise agreed
B. Creditor, unless it is otherwise agreed
C. Creditor,
notwithstanding
any
stipulation to the contrary
D. Debtor,
notwithstanding
any
stipulation to the contrary
11. In order to affect third persons, a real
estate mortgage must be registered with
the Register of Deeds:
A. Where the mortgagor resides
B. Where the mortgagee resides
C. Where the subject property is located
D. Where both the mortgagor and
mortgagee resides
12. I. The parties may stipulate that afteracquired properties are automatically
included in the real estate mortgage.
II. A deed of real estate mortgage may
expressly provide that it may secure afterincurred or future obligations.
A. Only I is true
B. Only II is true
C. Both statements are true
D. Both statements are false
B. Extinguished upon sale
C. Extinguished upon transfer of
possession
D. Binds the personal properties of the
buyer
15. A stipulation forbidding the owner from
alienating the immovable mortgage shall
be
A. Voidable
B. Valid
C. Void
D. Unenforceable
16. I. Chattel mortgage on shares of stocks
need not be registered in the stock and
transfer books.
II. A machinery installed by the lessee on
the leased premises may be subject of a
chattel mortgage.
A. Both statements are true
B. Both statements are false
C. Only I is true
D. Only II is true
17. For mortgage over shipping vessels to be
effective as to third persons, it must be
recorded in the office/s of:
A. Maritime Industry Authority and
Register of deeds
B. Maritime industry authority only
C. Register of deeds only
D. Philippine Coast Guard only
13. If the mortgage is not recorded in the
Registry of Property, it is
A. Void
B. Voidable
C. Binding between the parties
D. Unenforceable
18. I. A chattel mortgage can only cover
obligations existing at the time the
mortgage is constituted.
II. Since a chattel mortgage is just a
security, foreclosure thereof will not
prevent the mortgagee from applying any
deficiency that may result after applying
the proceeds of the foreclosure sale to the
obligation.
A. Both statements are true
B. Both statements are false
C. Only I is true
D. Only II is true
14. If a mortgaged property is sold to a buyer,
what happens to the mortgage?
A. Continues to exist
19. Where the proceeds from the sale of
mortgaged property (Chattel mortgage) do
not fully satisfy the secured debt, is the
Page 6 of 7
Downloaded by Mylene Bendijo (mbendijo15@gmail.com)
lOMoARcPSD|25441420
UNIVERSIDAD DE DAGUPAN
NOTES ON CREDIT TRANSACTIONS
mortgagee entitled to recover the
deficiency from the mortgagor?
A. No, the rule on pledge applies to
chattel mortgage
B. No, the chattel satisfies the obligation
in full
C. No. nothwithstanding any stipulation
to the contrary
D. Yes, the mortgage is entitled to
recover
20. When a chattel mortgage is entered into as
security for the purchase of personal
property payable in instalments, no
deficiency judgement can be asked. Any
agreement to the contrary shall be
A. Valid
B. Void
C. Voidable
D. Unenforceable
-END-
Page 7 of 7
Downloaded by Mylene Bendijo (mbendijo15@gmail.com)