Insolvency in Brazil
This article will give an overview of insolvency issues in Brazil and of how it affects economy and becomes a threat to the current credit bubble that has made the country grow.
Between 2004 and 2009, 26 million Brazilians emerged from poverty and joined what is called Class C. This achievement is the main responsible for the current economic growth Brazil has been experiencing. However, it is important to say that this growth is sustained by credit and as insolvency is a major problem in Brazil, credit card issuers and loan companies charge overpriced interest rates from those who do not pay their bills by the time they fall due.
After a 30-day delay, the overdue private person or legal entity will no longer have access to credit as his tax ID will be sent to credit rating bureaus. When applying for credit or to pay for a good through installments, the consumer will have his tax ID checked by the bank or store and if there is a remark registered on the record, the transaction won't be completed.
Currently, at least 30 million Brazilians are considered to be overdue with their bills and this has led to a more accurate selection when it comes to credit. When applying for installment buying, consumers could compromise up to 30% of their income; nowadays, this amount has been reduced to 20%.
Insolvency is strongly present among the new members of Class C. Now they are finally able of buying and the constant offer of discounts and installments have led many people to lose control over how much money they make and how much they can spend.
How does it happens?
Consumerism leads to job generation and job generation leads to consumerism. As it has been said in other occasions, Brazil is going through a period of professional shortage and people have felt more confident about their jobs, as they have been experiencing a certain stability. This way, it is hard to resist to all “special deals” available in the market when you know that, at worst, you can always get a loan or rely on overdraft limit.
The problem is that interest rate in Brazil is extremely high, ranging monthly 9,57% for overdraft usage and up to 10,7% for credit cards. It is very usual, for example, to use the credit card to pay your bills and your overdraft to pay your credit card. This is how people begin to lose control over their spending.
Another cause is the unexpected unemployment. Brazilians are not known for planning and administrating their money very well, so when something unexpected happens – as losing their jobs – they have no savings to rely on.
The immediate consequence is a significant delay to pay the bills and if this delay surpasses 30 days, the consumer's tax ID number will be registered as a remark by credit rating bureaus. After 30 days, it is even harder to get a job as some companies refuse to hire those who are registered as bad payers. The indebted finds himself in a situation very hard to get away: he is in debt because he hasn't got a job and he will not get a job until he solves his situation with the creditor.
Credit rating bureaus affect more intensely those who rely on credit and installments. Having that in mind, it is easier to understand why so many people take so long to pay their debts. The general idea is that you still keep your income (except in cases of overdraft usage) and there is no official measure that allows banks and financial institutions to deduct money straight from your bank account in order to make you pay for your debts.
Credit will be denied to you while your tax ID is still on credit rating bureaus, but it is important to say that the remark to your tax ID will expire after five years. After that, you will be able to apply for credit again (at least in theory) regardless on having paid your debts or not. For this reason, it is very common to have people making a major purchase they can not afford (such as home furnishing) and simply do not paying for it, as they know that five years later, they will be able to do the same thing again.
Of course, being in debt is an annoying situation, as daily phone calls and several letters a month can increase your level of stress. Besides, having credit denied can be very shameful for some people. However, specially among lower classes, it is very common to have someone who you can rely on. For example, let's say you want to buy a new refrigerator in installments, but your tax ID is registered on a credit rating bureau. You can easily ask a friend or relative who has credit available to buy it for you and then instead of paying the store, you pay your friend. This is very common in Brazil and an evidence that many people do not care whether they are in debt or not. Actually, many of them see it as a clever thing to do, as you are pretty much getting something for free.
In some extreme cases, assets can be confiscated. Essential assets, however, can not be pledged. Among them are:
- The house where the person in debt is living (it does not include second homes)
- Any income used to support the family
- Savings up to 40 minimum salaries
It is also important to say that debt collectors can not embarrass, threat or interfere with the indebted work or rest. In this scenario, it is considerably hard for companies to regain what they have lost. As an attempt to “punish” bad payers, creditors have kept a list of bad payers for about 20 years, so even when indebted individuals are done with credit rating bureaus, they will still have problems when applying to a credit card or to a purchase in installments.
As you can see, debt collection in Brazil is very restricted and creditors do not have many options. With the rise of millions of people to class C and with increasing levels of insolvency, the only option banks and creditors have is to rise interest rates. Such practice has led to many comments about a possible credit bubble in Brazil.
When creditors realize that phone calls and warnings are not having the desired effect, they hire a company specialized in debt collection. This usually happens when the debt has expired 90 days. These debt collection companies are known for a more aggressive (and sometimes illegal) approach, as in many cases it causes embarrassment to the indebted, appealing to threats and coercion, besides interfering with his rest and work.
Debt collection agencies in Brazil have no tools to work with, so the only advantage is the routine and the know-how they can offer, as it can be very expensive to allocate sales people to work with debt collection.
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