Over-indebtedness is an issue affecting an increasing number of consumers in Brazil. It refers to a situation in which an individual, acting in good faith, becomes unable to meet their financial obligations without compromising their essential living expenses. This problem gained significant attention with the enactment of Law No. 14.181/2021, known as the Over-Indebtedness Law, which introduced new protective measures for financially distressed consumers.
1. What Constitutes Over-Indebtedness?
Over-indebtedness occurs when accumulated debts become unpayable within a person's available income, endangering their livelihood and financial stability. This situation is categorized into two types:
- Active Over-Indebtedness: When a consumer takes on excessive debt due to impulsive spending or lack of financial planning.
- Passive Over-Indebtedness: When unforeseen circumstances, such as unemployment, health issues, or economic crises, lead to an inability to meet financial obligations.
2. Consumer Rights Under the Over-Indebtedness Law
Law No. 14.181/2021 amended the Consumer Protection Code (CDC) and the Elderly Statute to provide enhanced protection for consumers facing financial distress. The key rights established include:
- Debt renegotiation opportunity – Consumers can request a conciliation hearing to present a structured repayment plan based on their financial capacity.
- Protection of essential living expenses – The law ensures that debt restructuring cannot compromise the minimum existential income required for basic survival.
- Transparency and financial education – Creditors must provide clear information on debt risks, loan conditions, and financial management.
3. How Does the Debt Renegotiation Process Work?
Consumers can file a judicial request for debt restructuring based on Article 104-A of the Consumer Protection Code. The process follows these steps:
- The debtor formally requests a debt review in court.
- The judge schedules a conciliation hearing with all creditors.
- The consumer presents a payment plan, with a maximum duration of five years.
- If an agreement is reached, the judge ratifies the plan, making it legally binding.
It is important to note that debts incurred in bad faith, such as fraudulently contracted loans or high-risk financial obligations undertaken with no intent to repay, are excluded from renegotiation.
4. What Happens if No Agreement is Reached? The Compulsory Judicial Plan
If creditors reject the proposed repayment plan during the conciliation phase, the judge can initiate a judicial debt restructuring process. This aims to integrate and review remaining debts under a compulsory repayment plan, ensuring a structured and balanced approach to resolving financial distress while preserving the consumer’s minimum existential income.
Key Benefits of the Judicial Debt Plan for Debtors
- Inclusion of all remaining creditors – The judge ensures that all outstanding debts not previously settled are included in a unified payment structure.
- Suspension of debt collection and legal enforcement – Pending enforcement actions and debt collection processes may be temporarily halted.
- Contract revision and financial relief – The judge may adjust repayment terms, such as interest reduction or extended payment deadlines, to ease financial burden.
- Five-year maximum repayment period – Like voluntary negotiations, the judicial plan allows repayment over up to five years, with the first installment due within 180 days of court approval.
- Limited monetary correction – The plan ensures that creditors receive, at minimum, the principal amount adjusted for official inflation indexes, avoiding excessive interest charges.
- Credit score recovery – The plan may include provisions for removing the debtor from credit blacklists, allowing them to regain financial credibility.
5. The Minimum Existential Income and Excluded Debts
A core principle of the Over-Indebtedness Law is the preservation of a minimum existential income, ensuring that essential living expenses remain protected. Decree No. 11.150/2022 defines this threshold as BRL 600.00 per month (updated by Decree No. 11.567/2023). This amount is safeguarded in any debt renegotiation to ensure the consumer's survival.
Which Debts Cannot Be Renegotiated?
Not all financial obligations qualify for restructuring under the law. Article 104-A, §1º of the Consumer Protection Code and Decree No. 11.150/2022 exclude specific types of debts, including:
- Payroll-deductible loans – As outlined in Article 4, Item I, letter "h" of Decree No. 11.150/2022, debts with direct payroll deductions are not considered for over-indebtedness relief.
- Secured loans (real estate and vehicle financing) – Loans backed by real estate or vehicle collateral are not eligible for judicial restructuring under this law.
- Debts incurred in bad faith – Consumers who contract financial obligations fraudulently or with no intent to repay cannot access debt renegotiation mechanisms.
Why Are These Debts Excluded?
The exclusion of these categories is due to pre-existing legal frameworks governing such contracts, which already outline specific default and renegotiation procedures. For example, payroll-deductible loans typically feature lower interest rates and direct salary deductions, ensuring predictability for both debtor and creditor.
The Importance of Proving Over-Indebtedness
To qualify for debt restructuring, consumers must present concrete evidence—such as bank statements, loan agreements, and expense records—demonstrating that their disposable income is insufficient to cover essential costs. Courts require more than just claims of financial hardship; documented proof is essential.
A notable example is a recent ruling from the São Paulo Court of Justice (TJSP, Case No. 1022747-05.2024.8.26.0577), where the judge denied debt restructuring because the plaintiff failed to prove insufficient income. Additionally, the plaintiff sought to include payroll-deductible loans, which are explicitly excluded from over-indebtedness claims.
6. Conclusion
Over-indebtedness is a pressing issue, but Brazilian law provides structured solutions to help consumers in good faith regain financial stability. However, the law does not allow for indiscriminate debt relief—strict criteria apply, and not all debts are eligible.
Legal intervention in these cases requires a careful approach, ensuring that debt restructuring preserves essential living conditions while upholding contractual obligations. Consumers facing financial hardship should seek professional legal guidance to assess their eligibility under the Over-Indebtedness Law.
Interested in Learning More?
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