Should We Sell Unpaid Debts to a Third Party in Brazil?
Creditors often look for ways to recover unpaid debts in Brazil, especially when dealing with international transactions. One option is to assign (sell) those receivables to another party, known locally as a Cessão de Crédito. Though this tool resembles practices in the United States, the Brazilian market for such assignments is less robust. Even so, many foreign entities still consider it, hoping to streamline their legal disputes in Brazil and obtain faster liquidity.
Debt Assignment Basics
Under Brazilian law, creditors can transfer their rights to a third party, including debt recovery agencies from abroad. This right is clearly stated in the Civil Code, and it allows immediate cash flow for companies that prefer to avoid the complexities of collecting across borders. While the concept is simple, practical challenges emerge. Some creditors struggle with incomplete documents or insufficient proof of debt. Others find that their instruments do not strictly comply with Brazilian legal standards, making them less appealing to prospective buyers.
Because of these hurdles, deals may fall through. Assignors from the US or other jurisdictions often discover that the Brazilian environment for credit assignment is not as streamlined as it is in their home countries. However, despite the lower frequency of successful transfers, the potential benefits can still be attractive for those who want to exit protracted disputes in Brazil.
Timing and Valuation
Debt nearing its statute of limitations or involving uncertain litigation might appear suitable for assignment. In more mature markets, distressed assets can still command a price, even if discounted. In Brazil, the reality is different. Courts can take longer to resolve litigation, and the final outcome is influenced by honorários de sucumbência (attorney fees imposed on the losing party). These extra costs often deter buyers or push them to bid even lower.
To gauge whether a sale makes sense, creditors should assess the age and quality of the debt, as well as the likely cost of enforcement. Credits that are close to expiration or burdened by complex defenses can be harder to market. Though a discounted settlement may still beat the alternative of maintaining a costly lawsuit, the price offered might be significantly below expectations.
Legal Requirements
Article 290 of the Brazilian Civil Code states that the debtor must be notified of any credit assignment. If this notice is not provided, the debtor can still validly pay the original creditor. Proper notification safeguards the new creditor’s right to pursue payment and eliminates confusion about who is entitled to receive funds.
Even when all the formalities are satisfied, litigation can be unpredictable. Defendants in Brazil often raise every possible procedural defense. Any lapse in notice or documentation may give the debtor a basis to contest the validity of the assignment. To avoid such risks, many companies seek local legal representation for lawsuits and disputes in Brazil to ensure their papers are in order.
Foreign Party’s Perspective
For creditors abroad, selling unpaid debts in Brazil can free up resources and reduce administrative burdens. Receiving a lump sum at a steep discount might feel frustrating, but it can be preferable to wading through multiple court dates and mounting legal fees. It also removes the uncertainty that comes with Brazilian litigation, where defendants sometimes use stalling tactics and procedural maneuvers to slow the process.
On the other hand, credit assignment opens another front of legal scrutiny. Debtors sometimes challenge the assignment itself, questioning its validity or claiming they were never properly notified. While these disputes rarely invalidate a legitimate transfer, they can prolong the procedure and add to costs. Careful documentation and engagement with reliable Brazilian attorneys are often essential to avoid additional headaches.
Short-term liquidity is the main attraction, but the trade-off is the price. Brazil’s less predictable legal landscape means buyers will factor in the risk. This drives offers down and can discourage creditors looking for a fair value. Nonetheless, for creditors who no longer wish to manage cross-border disputes, selling those unpaid claims can be a reasonable choice.
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