Business in Brazil: Credit Culture and Debt Recovery
by Jorge Chavez on February 10, 2015
One consequence of Brazil’s impressive economic growth at the turn of the century is that it is simultaneously experiencing a boom in debt and the collection thereof. Low unemployment, rising salaries, and a brand-new middle class have led to a marked increase in lending, with the volume of credit in Brazil nearly doubling over a ten year period. Credit accounts for almost 50 percent of Brazil’s gross domestic product, and nearly 5.6 percent of the 2 trillion Brazilian reais ($1.1 trillion USD) is more than 90 days past due. As a result, debt recovery in Brazil has become big business..
In another article, we discussed the complexities international partners may face when doing business with and within Brazil. The country’s unique credit practices may also challenge debt collectors and accounts receivable managers unfamiliar with Brazil’s distinct perspective on the nature of debt and credit. Understanding the distinct relationship between Brazilians and credit can help you develop an efficient, effective debt collection strategy and strengthen future relationships in the largest developing market in South America.
One limitation that may surprise foreign collectors is that, in Brazil, salaries cannot be seized for the payment of debts. This rule is based on Brazilian legal tradition, which assumes that wealthier people and organizations have assets and collateral with which to secure their debts. Conversely, the theory goes, the income of a less wealthy individual is crucial to their survival and should not be subject to garnishment or seizure. In extreme cases, assets may be confiscated but essential assets such as homes, income used to support a family, and certain amounts of savings cannot be recovered. While this limitation is slowly being picked apart by Brazilian courts, it has created a cultural attitude toward credit that may seem surprising to American and other foreign collectors.
Since there is no official way for banks and financial institutions to deduct money straight from an individual’s bank account in order to pay for debt, many Brazilians in the sharply class-divided country have a somewhat unusual attitude towards credit. In Brazil, credit will only be denied while the citizen’s tax ID is still on file at the credit rating bureaus, a number which expires after a five-year period. Theoretically, an individual will be able to apply for credit after that time regardless of whether they paid their debts or not. For the more impatient, a common practice among lower income citizens is to ask a friend or relative with credit available to make a large purchase and pay them back instead of the merchant. However, while the official credit rating bureaus may only keep records for five years, creditors often keep lists of delinquent debtors for twenty years or more.
The Challenge of Consequence-free Credit
When it comes to debt recovery, collectors don’t have a lot of options in Brazil as the system is heavily weighted in favor of the debtor. This wasn’t always the case, however. In the past, Brazilian agencies would actually dress their collectors as clowns. The clown/collectors, in full regalia, would park their car outside the debtor’s premises and use trumpets, drums, and loudspeakers in an attempt to shame them into repayment. While this (apparently quite effective) practice is thankfully now illegal, under current Brazilian law creditors have a distinct lack of tools available with which to recover debt. The consequences for nonpayment are rarely effective when it comes to recovery. The official credit bureau ratings expire in five years, and debtors can simply pay a fee to remove their names from the blacklists compiled by Brazilian credit-report firms. This practice often leaves creditors high and dry, unable to collect what they are owed, and allows delinquent debtors to acquire even further bad loans and credit. It’s worth noting that legal remedies for debt recovery do, of course, exist, and we will be further exploring the process in a future post.
Brazilian law and culture presents a challenge for even the most diligent accounts receivable departments. A partner with in-depth knowledge of local procedures and practice may be the best means of recovering what is owed. D&S Global Solutions has extensive experience with risk management and asset recovery in Brazil, South America, and all across the world, and our customizable solutions and commitment to customer service can offer your business the expertise needed to thrive in an unfamiliar environment.