Short answer. The pledgee collects it. Under Article 2118, when a pledged credit falls due before the pledge is redeemed, the pledgee may collect and receive the amount due, apply it to the loan you owe, and return any surplus to you. You do not collect while the pledge is in force.
What the law says
If a credit which has been pledged becomes due before it is redeemed, the pledgee may collect and receive the amount due. He shall apply the same to the payment of his claim, and deliver the surplus, should there be any, to the pledgor.
Civil Code, Article 2118 — Pledged Credit Falling Due. Read the full provision →
Why the pledgee collects, not you
When you pledge a promissory note or any other credit instrument as security for a loan, you transfer possession and, with it, the right to receive payment on that instrument while it remains pledged. The pledgee holds the credit as collateral. If the note falls due during the pledge period — before you have repaid the loan and reclaimed the note — the statute gives the pledgee the right to collect directly from the person who owes on the note. You cannot intercept that payment because the credit is not under your control while the pledge is active.
How the money is applied
Article 2118 sets out a two-step process. First, the pledgee applies the collected amount to the payment of his claim — meaning the loan principal, interest, and any agreed charges that you owe him. This is the core purpose of the pledge: the pledgee gets repaid from the proceeds. Second, if there is any surplus after the pledgee's claim is fully satisfied, that surplus must be delivered to you. The pledgee cannot keep excess proceeds. The arrangement is designed so that the pledgee recovers exactly what is owed — no more, no less — and the rest belongs to you as the pledgor.
What happens if the note proceeds are less than the loan
Article 2118 addresses what happens when the pledged credit is collected and applied — but it does not say that collecting the pledged credit fully discharges the underlying loan. If the amount collected from the note is less than the total obligation you owe, the difference remains owing. The pledgee has satisfied part of the claim from the pledged credit, but you are still responsible for the shortfall. The pledge extinguishes what it covers; anything beyond that continues as a personal obligation.
What to watch for in practice
If you pledged a promissory note and the debtor on that note has already paid it, ask the pledgee for a full accounting of how the proceeds were applied. The pledgee is required to apply them to your loan and return any surplus — you are entitled to know the exact figures. If the pledgee collected on the note but has not accounted for the proceeds or returned a surplus that exists, that is a legitimate basis for a legal complaint. Keeping records of the face value of the note, its due date, and the outstanding balance of your loan will help you verify the accounting when the time comes.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Citibank, N.A. (Formerly First National City Bank) vs. Modesta R. Sabeniano, G.R. No. 156132, October 12, 2006 — read the decision on LawPhil →