Article 287 of the Obligations Code (OZ) prescribes a systematic approach to the allocation of payments when a debtor makes a partial payment that is insufficient to cover all obligations.

• Agreement on the order of repayment. If the creditor and debtor have not agreed on how the obligations should be allocated, the debtor must specify the order in which the obligations are to be settled at the latest when making the payment. This agreement must be clear and expressed at the time of fulfilling the debt.
• Absence of the debtor’s statement. If the debtor does not provide a statement on how the obligations should be allocated, payments are applied in the order in which the obligations became due. This means that older obligations are settled before newer ones.
• Priority based on security. If the obligations are equally secured, those that are least secured are settled first. If the levels of security are the same, the obligations that impose the greatest burden on the debtor are settled first.
• Equal obligations. If the obligations remain equal under the previous rules, they are settled in the order in which they arose. If they arose simultaneously, the amount paid is distributed proportionally among all obligations in accordance with their amounts.

Article 288 of the OZ precisely regulates the order of allocation among costs, interest, and principal when the debtor fulfils their financial obligations.

• Allocation of costs. If the debtor owes costs in addition to the principal, these costs are settled first. This means that required costs are paid before other types of debts.
• Allocation of interest. After the costs are settled, the interest owed to the creditor is paid. Interest is considered a secondary type of debt that follows the settlement of costs.
• Allocation of principal. Finally, after the settlement of costs and interest, the remaining principal of the debt is allocated. The principal represents the basic amount of debt, which is paid to the creditor after the previous two types of debts have been settled.

This provision promotes transparency and efficiency in financial transactions and ensures legal certainty.

Exercise:

1. The debtor owes the creditor not only the principal but also interest and costs. The payment made by the debtor is insufficient to cover the entire obligation (i.e., the amount paid is less than the total of the principal, interest, and costs).

• In what order will the principal, interest, and costs be settled from the amount paid?
• Which provision of the OZ regulates this?
• Can the debtor choose the order of repayment?

2. A is late in paying €500 to B. B has filed a lawsuit demanding the payment of €500 plus statutory default interest. A argues that B is not entitled to default interest because they were not contractually agreed upon.

How will the court decide? Justify your answer!¹⁸¹