MV Mercraft 2 caught fire just before it reached the port of Real in the province of Quezon, about 60 kilometers (37 miles) east of the capital Manila.
He left Polilio Island at 5 a.m. local time and reported a disaster at 6:30 p.m.
Five women and two men were killed and 120 passengers were rescued, with 23 being treated for injuries, a Coast Guard statement said.
Photos shared by the Coast Guard show people in life jackets floating in the sea waiting to be rescued, while some were taken to safety by a cargo ship in the area.
Fire and thick smoke engulfed the two-story passenger ship.
The cause of the fire is not immediately clear, but the Philippines, an archipelago of more than 7,600 islands, has poor maritime safety data.
Ships are often old and overcrowded.
In 1987, some 5,000 people died in the worst shipping disaster in peacetime, when the congested passenger ferry Dona Paz collided with an oil tanker off the island of Mindoro south of the capital Manila.
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