CHATTEL MORTGAGE

Art. 2140- by a chattel mortgage, a personal property is recorded in the Chattel Mortgage Register as a
security for the performance of an obligation

Chattel Mortgage- is that contract by virtue of which personal property is recorded in the Chattel
Mortgage Register as a security for the performance of an obligation

Characteristics of Chattel Mortgage:

1. Accessory Contract- because it is for the purpose of securing the performance of a principal
obligation.
2. Formal Contract- because for its validity, registration is the Chattel Mortgage Register is indispensable

3. Unilateral Contract- because it produces only obligations on the part of the creditor for free the thing
from the encumbrance on fulfillment of the obligation

Laws Governing Chattel Mortgage:

1. The Chattel Mortgage, Act. No. 1508 as amended.

2. The Civil Code
3. The Revise Administrative Code
4. The Revised Penal Code
5. The Ship Mortgage Decree of 1078 (PD No. 1521) governing mortgage of vessels of domestic
ownership

Offenses Involving Chattel Mortgage:

1. Knowingly removing any personal mortgaged under the Chattel Mortgage law to any province or city
other than the one in which it was located at the time of the execution of the mortgage, without the
written consent of the mortgage.

2. Selling or pledging personal property already mortgaged, or any part thereof, under the terms of the
Chattel Mortgage Law without the consent of the mortgagee written or the back of the mortgage, duly
recorded in the Chattel Mortgage Register

An essential element common to the two acts punished under Act. 319 of the Revised Penal Code is
that, the property removed or repledged, as the case may be, should be the same or identical property
that was mortgaged or pledged before such removal or pledging. The mortgagee is not relieved from
criminal liability even if the mortgage indebtedness is thereafter paid in full, or, the mortgagor-seller
informed the purchaser that the thing sold had been mortgaged. But the sale is valid although no
written consent was obtained from the mortgagee and the mortgagor opens himself open to criminal
prosecution.

Pledge- is a contract by virtue of which the debtor delivers to the creditor or to third person a movable
(Art. 2094) or document evidencing incorporeal rights (Art. 2095) for the purpose of securing the
fulfillment of principal obligation with the understanding that when the obligation is fulfilled, the thing
delivered shall be returned with all its fruits and accessions.

Kinds of Pledge

1. Voluntary or Conventional- one which is created by agreement of the parties.

2. Legal- one which is created by operation of law. (Art. 2121)

Characteristics of the Contract

1. Real Contract- because it is perfected by the delivery of the thing pledged by the debtor who is called
the pledgor to the creditor who is called the pledgee, or a third person by common agreement.
2. Accessory Contract- because it has no independent existence of its own

3. Unilateral Contract- because it creates an obligation solely on the part of the creditor to return the
thing subject thereon upon the fulfillment of the principal obligation
4. Subsidiary Contract- because the obligation incurred does not arise until the fulfillment of the
principal obligation which it secured

Chattel Mortgage and Pledge Distinguished

1. In chattel mortgage, the delivery of the personal property to the mortgages is not necessary while in
pledge, such delivery is necessary.
2. In chattel mortgage, the registration of the mortgage document in the Chattel Mortgage Registry is
necessary for its validity, while in pledge, registration in the Registration of property is not necessary.

3. The procedure for the sale of the thing given as security is different. In chattel mortgagee, the
procedure is found in Sec. 14 Act No. 1508, while in pledge, it is found in Art. 2112 of the Civil Code.
4. In chattel mortgage, if the property is foreclosed, the excess over the amount due creditor goes to the
debtor (Sec. 14, Act. No. 1508), while in pledge, the debtor is not entitled to the excess unless it is
otherwise agreed (Art. 2115) or except in the case of legal pledge (Art. 2121).

5. In chattel mortgage, if the property is foreclosed and there is a deficiency, the creditor is entitled to
recover the deficiency from the debtor, except if the chattel mortgage is a security for the purchase of
personal property under installments (Art. 1484). In pledge, if the property is sold and there is a
deficiency the creditor is not entitled to recover the deficiency notwithstanding any stipulated to the
contrary (Art. 2115)

CREDITMAN

Kind of Creditman

1. Mathematician Creditman- one who is generally impressed by the reports submitted or obtained
from the applicant. They fail to appreciate and recognize the element of relatively or the fact that the
figures in the financial reports are historical quantitative figures which must be subjective to qualitative
evaluation to appreciate value of the figures as reflected in the financial report.

2. Gaya-Gaya Puto Maya (Follower) Creditman- the credit manager will extend credit to a customer up
to 25%- 50% of the amount extended by the recognized leaders of the credit manager’s industry.

3. Historian Creditman- this credit manager generally based his credit decision on the past performance
of the customer without giving serious consideration about the exigencies of socio- political, economic
factors locally or internationally.

4. Sentinel Creditman- a credit manager unwittingly practices this mode of managing their department
operation generally due to lack of education, training or experience and challenges met in the
demanding role of their position.

5. Necessary Evil Creditman- this kind of a credit manager will invariably pose no objection in having
some losses in the management of the receivables, conscious of the fact that not all credit transactions
can be collected. So he provides for a bigger than generally acceptable level for allowances for
uncollected receivables.

Government Mechanisms to Administer Credit

1. increasing or decreasing the legal/ liquidity reserve requirements of banks and other financial
institutions
2. Issuing government credit instruments such as bonds, government securities, treasury bills and the
like
3. Selective credit controls such as rediscounting facilities given to Board of Investment, registered
industries and companies
4. Legal and moral persuasion such as the 5 day banking week and uniform clearing procedures for
checks, debt instruments
5. Legal action or outright coercion by the secretary of finance, BSP Monetary Board.

Elements of Credit:
1. trust or confidence
2. risk

Factors in Credit Risks Analysis

a. personal factor
b. performance factor
c. economic factor
d. risks factor
e. security factor

Basis of Credit:
1. Character- credit applicant’s personality
2. Capital- the owned movable property of a credit applicant in his name (cars, jewelry etc)
3. Capacity- the ability of the credit applicant to earn enough to repay credit obtained (income)
4. Condition- the debtor’s existing physical, economic, financial and political situation in his place of
business/ residence
5. Collateral- properties owned by the credit applicant (house and lot, land)
6. Connection- sino’ng kilala mo

Objectives of Establishing Credit Policies

1. To maximize sales
2. To minimize costs and bad debts losses
3. To attain profit or income objectives
4. For control/ incentive
5. for sustainability and growth

Factors to Consider in Formulating Credit Policies

1. Capital
2. Competition
3. Product or Service
4. Kinds of Customer or Target Market

FACTORS TO CHECK ON CREDIT APPLICANT

Financial Factors to Check on Credit Applicant:

1. Liquidity Ratios- measures the firm’s ability to meet its maturing short-term obligations
2. Leverage Ratios (Debt Ratios)- measures the extent to which credit applicant has been financed by
debt

3. Profitability Ratios- measures management’s effectiveness as shown in returns generated from sales
and investments
4. Efficiency Ratios (Asset Utilization)- measures how efficient and effective is the credit applicant in
using its resources

Non-Financial Factors/ Standards

1. Payment Performance
2. General Experience/ Background
3. Age of Business and Evidence of Sound Growth Potential
4. Impression of the Applicant and its Management
5. Adequacy of Resources/ Availability of Financing
6. Trend

Bonus Non-Financial Factors to Check

1. Security/ Collateral
2. Confirmed Payment Arrangement
3. Performance of Related Companies/ Joint Several Obligor
4. Form of Business Organization

Non-Financial Penalty Factors to Check

1. Recent Litigation
2. Recent Distressful/ Condition/ Illiquidity
3. Age of Credit Applicant/ Owner
4. Distributive Weakness

Credit Scorecard- is a credit rating system used to assess, evaluate individual credit applicants for
ordinary short or medium or medium term credit application

Specific Needs for a Credit Scorecard:

1. To determine the risks level or degree on the credit applicant
2. To evaluate the adequacy of risk cover or security or collateral
3. To assist in developing the credit transaction or payment modes for the transaction
4. To assist in determining the credit levels or amount to be granted, the credit term or period to be
extended
5. As a source of auditing information for credit transactions

Advantages of Credit Scorecard:

1. Credit policies maybe revised more objectively to meet sales marketing, credit and collection
situations
2. It may provide a better guideline to less experienced creditman in arriving at a credit decision
3. It may mitigate costs of credit investigation
4. May provide good monitoring and control over the risks of new accounts

Credit Equation
1. Character + Capacity + Capital +Condition = Good Credit Risk
2. Character + Capacity + Insufficient Capital = Fair Risk
3. Character + Capital + Insufficient Capacity = Fair Risk
4. Capacity + Capital + Impaired Character = Doubtful Risk
5. Character + Capacity – Capital = Limited Risk
6. Capacity + Capital – Character =Dangerous Risk
7. Character + Capital – Capacity = Marginal Risk
8. Capital – Character – Capacity = Poor Risk
9. Character – Capacity – Capital = Very Bad Risks
10. Capacity – Character – Capital =Fraudulent Risk

Introduction to Credit

Credit – is the ability of a person to obtain goods or services under a promise of future payment.

Debt- is the outstanding unpaid balance of obtained credit from another.

Importance of Credit to Business:

1. Facilitates the movement of goods and services through the channels of trade to the consumers
2. Sustains and promotes production
3. Establishes rules for credit and collection transactions
4. Leads to efficient collection of accounts receivable
5. Contribute as a profit center to the attainment of a company’s desired profit targets either by itself or
in cooperation with a
company’s sales and marketing units
6. Helps in teaching debtors good credit habits and practices
7. Can serve as a tool in attaining personal and business goals.

Importance of Credit to the Country:

1. Credit is an agent of production
2. Credit develops the salability of goods and services
3. Credit is a liquidity medium
4. Credit is a medium of capital formation
5. Credit complements the monetary system
6. Credit is a tool for the redistribution of wealth
7. Credit helps in the creation of business
8. Credit motivates higher business standards and practices
9. Credit increases purchasing power
10. Credit make it possible to attain growth and progress.

Negative Impact of Credit on People:

1. Can be a wedge between people
2. May motivate for unwise and/ or conspicuous consumption
3. May lead to speculation/ over expansion
4. Credit causes dependence on others
5. Lack of credit is one bit reason for stagnation/ retrogression of people.

Characteristics of Credit:
1. As a bipartite contract
2. As a pecuniary contract
3. As a fiduciary contract
4. It always involved risk.

Categories of Credit:
1. Consumer Credit
a. Retail Credit
b. Personal Credit

2. Mercantile or Commercial Credit

3. Commercial, Development, Investment Credit
4. Rural, Thrift Bank Credit
5. Cooperative, Credit Union or Savings and Loans and
Micro-credit
6. Government Credit
7. Foreign Credit
 WAYS TO FORTIFY OR SECURE CREDIT

Methods Used to Secure Credit:

1. Joint and Several (Solidary) Obligation- a person who agrees to be bound under such a mode,
answers personally and directly for the obligations created under the contract.

2. Real Estate Mortgage- the conveyance of a real property as a security for the payment of money or
the performance of some other act, condition to become null and void upon payment or performance of
the obligation.

3. Pari-passu Arrangement- (by the same priority) - this is used by creditors who, marshalling assets are
entitled to receive out the same fund or asset without any precedence of each other except as to the
direct proportion of their financial exposures in the credit granted.

- this is a method of securing large amount of credit and is resorted to in special cases, particularly in
housing loan syndication/ consortium for big infrastructure projects.

4. Pledge- a contract whereby a personal property is delivered to the creditor or a third person as a
security for the performance of an obligation.

5. Surety- a contract or an agreement whereby a party called the surety guarantees the performance by
another party called the principal or obligor of an obligation.
- the surety undertakes to pay if the principal does not pay, the insurer of the debt, conclusively deemed
an original promisor without a need of exhaustion of all collection efforts to collect from
the principal.

6. Guaranty- a contract whereby a person, called the guarantor, binds himself to the creditor to fulfill
the obligations of the principal debtor in case the latter fails to do so. He is only liable if the principal
cannot pay.

7. Assignment- a contract of purchase and sale. In an assignment of credit or a right, there is a definite
third person who is obliged, whereas in sales, it is the whole world which is obliged to respect the title of
the buyer

8. Chattel Mortgage- a conditional sale of personal property as security for the payment of a debt or the
performance of some other obligation specified, the condition being that the sale shall become null and
void upon the seller/ mortgagor paying to the purchase/ mortgagee a sum of money or doing some
other act named.

- any and all personal or movable property can be subject of a chattel mortgage.

9. Escrow Arrangement- an agreement whereby a deed or a contract, which may be coupled with
monetary consideration is delivered to a mutually acceptable stranger or third party with an obligation
for the latter to deliver unto the party in whose favor the deed or agreement is made, upon the
occurrence or performance of certain condition or obligation.
- it is the performance of the obligation imposed therein or the happening of a condition imposed that
makes the contract valid in favor of the grantee.

10. Letter of Credit- a written instrument from a bank directed to another bank requiring that the latter
bank allow the bearer of the letter of credit to buy commodities or service or to want (either to procure
the same or to pass his promise, bill or other engagement for it).

- basically a request directing someone to pay or give credit to a third party and promising to repay or
guarantee the same. It is an absolute undertaking to money advanced or the amount for which credit is
given upon the faith on the instrument

11. Trust Receipt Facility- an arrangement by virtue of which a banker or a creditor advances money to
a person for the purchase of goods, the former taking full title of the goods at the beginning and
continuing to do so until he is paid or if the good has been sold, until the proceeds of the sale are turned
over to him by the buyer or his successors-in-interest.
- a security transaction to aid importers, wholesalers and retailers of goods who do not have sufficient
funds or resources to finance the importation of merchandise and who may not be able to acquire credit
except through utilization as collateral of the merchandise or goods imported.

12. Hold Arrangement- a recent credit development that disallows any withdrawal from the debtor’s
deposit with the creditor, banking of financing institution during the duration of the credit granted. It
allows the creditor a charge or debit to the account for any unpaid balance of the obligation.

13. Surety Bond- it is substantially the same as suretyship, except that bonds are issued by non-life
insurance and bonding companies.

14. Trusteeship Agreement - A Trustee is a person to whom confidence is reposed as regards property
for the benefit of another person.

The trustee is given the possession or custody of the property without the power to dispose the
property as distinguished from an administrator who is given the incidental power of disposal.

General Types of Debtors:

1. The Up-To-Date (a dog type debtor)- a debtor who pays on time and who responds to available
prompt payment incentives offered because of his sound financial position.

2. Occasional Delinquent (a monkey type debtor)- most debtors become this type, because there is no
perfect matching of their income and expenses.

3. Habitual Delinquent (a lizard or butiki or turtle type of debtor)- this kind of debtor must be the
target of strict collection efforts to prevent his account becoming bad.

4. The Changed Circumstance (a chameleon type of debtor)- a debtor who, for health, social, economic
or political reasons by law, contract, accident or fortuitous event, suddenly cannot pay his obligation.
5. The Premeditated Delinquent (a crocodile type of debtor)- a debtor, in the first place should have
been noticed and avoided. Need fast, drastic and decisive collection efforts.

Acceptable Payments:
1. cash
2. check
3. payment in kind or service
4. payment from surety or guaranty payment bond
5. joint and several obligor (debtor)