Subsection 1. Application of Payments

Application of Payments

• The designation of the debt to which the payment must be applied when the debtor has several obligations of the same kind in favor of the same creditor.

Requisites of Application of Payments:

1. There must be one (1) debtor and one (1) creditor;

2. There must be two (2) or more debts;

3. The debts must be of the same kind; 

4. The debts to which payment made by the debtor has been applied must be due; and

5. The payment made must not be sufficient to cover all the debts.

It is necessary that the obligations must all be due, unless:

• There is a stipulation to the contrary; and

• The application of payment is made by the party for whose benefit the term or period has been constituted.

By agreement, the debtor and the creditor are able to amend the application of already made payments without impairing the rights of third parties obtained prior to such an agreement.

Rules on Application of Payments:

1. The debtor has the first choice; he must indicate at the time of making the payment, and not afterwards, which particular debt is being paid;

2. The right to make the application once exercised is irrevocable unless creditor consents to the change;

3. If the debtor does not apply payment, the creditor may make the designation by specifying in the receipt which debt is being paid;

4. If the creditor has not also made the application, or if the application is not valid, the debt, which is most onerous to the debtor among those due, shall be deemed to have been satisfied; and

5. If the debts due are of the same nature and burden, the payment shall be applied to all of them proportionately.

Rule in Article 1253 mandatory

• The debtor cannot choose to credit his payment to the principal before the interest is paid.

• Payment must be applied first to the interest and the balance left can be credited to the principal.

• A debtor's application that is prepared in violation of Article 1253's provisions may be rejected by the creditor.

Rule subject to agreement or waiver

• The rule is subject to any agreement between the parties, or to waiver by the creditor.

This provision applies only in the absence of a verbal or written agreement to the contrary (merely directory, not mandatory).

> If neither the debtor nor the creditor have applied the payment to any of them, the most burdensome debt will receive the payment first, and if the debts are all of the same nature and burden, they will all receive a proportionate share of the payment.

Rules to determine whether one (1) debt is more burdensome than another:

1. An interest-bearing debt is more onerous than a non-interest-bearing debt even if the latter is an older one.

2. A debt as a sole debtor is more onerous than as a solidary debtor.

3. Debts secured by a mortgage or by pledge are more onerous than unsecured debts.

4. Of two (2) interest bearing debts, the one with a higher rate is more onerous.

5. An obligation with a penalty clause is more burdensome than one without a penalty clause.

> The payment should be applied to all of the debts proportionately if it cannot be determined which debt is most onerous to the debtor.