Short answer. When two or more preferred creditors hold claims against the same specific real property, Article 2249 of the Civil Code requires that the property's proceeds be applied first to taxes and assessments, and then distributed among the creditors pro rata — proportionally to the amount each is owed.
What the law says
If there are two or more credits with respect to the same specific real property or real rights, they shall be satisfied pro rata, after the payment of the taxes and assessments upon the immovable property or real right.
Civil Code, Article 2249 — Two or More Credits on the Same Immovable. Read the full provision →
The pro rata rule explained
Article 2249 of the Civil Code sets out a straightforward rule: when two or more creditors each hold a preferred claim over the same specific piece of real property, none of them automatically wins outright. After the government's share — taxes and assessments — is paid first, whatever is left is divided among the competing creditors in proportion to their respective claims. A creditor owed twice as much as another receives twice the share. No creditor jumps the line based on who filed first or whose claim is older, as long as both claims qualify as preferred credits on that property.
What counts as a preferred credit on real property
The pro rata rule only applies to credits that are specifically preferred on the same immovable. A registered mortgage is the clearest example — it is a real right annotated on the title and attaches to the property. A contractor's lien for unpaid construction work on a building can also constitute a preferred credit on that immovable. However, a credit that is only generally preferred — one that follows the person rather than the specific property — does not compete under Article 2249. It belongs to a different tier of the preference system.
How the distribution is calculated
Suppose the building is sold for one million pesos and unpaid taxes absorb one hundred thousand. The nine hundred thousand remaining is then divided proportionally. If the registered mortgage is for six hundred thousand and the contractor's lien is for four hundred thousand — a total of one million in competing claims — the mortgagee receives 60% of the nine hundred thousand (five hundred forty thousand), and the contractor receives 40% (three hundred sixty thousand). Both take a haircut. Neither gets paid in full when the proceeds are insufficient to cover both claims.
What remains unpaid after the distribution
The amount each creditor does not recover from the specific property does not disappear. The unpaid balance becomes a general credit against the debtor's other assets and must be satisfied from whatever else the debtor owns, following the general order of credits under the Civil Code. A creditor who receives less than their full claim through the pro rata distribution can still pursue the shortfall — they simply lose their preferred position with respect to that particular property and must compete with other general creditors for the remainder.