Default is one of the main challenges faced by lenders in Brazilian credit transactions. The existence of collateral package, with in rem and personal guarantees may play a decisive role in judicial and extrajudicial credit recovery.
Key forms of in rem collateral (known as garantia real) include:
1. Mortgage (Hipoteca): Security established over immovable property through registration with the real estate registry, without the debtor losing direct possession of the property. It is easily proven in court and grants the creditor priority in the satisfaction of their debt in relation to other creditors. Such type of collateral is subject to the effect of judicial recovery and bankruptcy in Brazil.
2. Fiduciary Lien of Movable or Immovable Assets (Alienação Fiduciária): Under this collateral, the debtor transfers fiduciary ownership of the asset to the creditor while retaining direct possession. Upon default, the creditor may consolidate full ownership and proceed with the sale of the asset, often through extrajudicial means. Fiduciary transfers are commonly used in vehicle and real estate financing, offering the advantage of expedited credit recovery and, in some cases, eliminating the need for court intervention. Such type of collateral is not subject to the effects of judicial recovery and bankruptcy in Brazil.
3. Pledge (Penhor): Security established over movable assets, such as machinery, inventory, plantation, among others. The pledged asset is tied to the debt and may be held by the creditor or a third party (as in commercial or rural pledges). If the debtor defaults, the asset is directly liable for the payment of the obligation. Such type of collateral is subject to the effect of judicial recovery and bankruptcy in Brazil.
Personal guarantees, also known as fidejussory guarantees include:
1. Aval: A guarantee strictly associated with credit instruments, such as checks and promissory notes. The endorser (avalist) assumes joint and several liability for payment and may be sued directly, on the same footing as the principal debtor.
2. Fiança: In this form, the guarantors signs the principal agreement or a separate letter of fiança and undertakes to fulfill the debtor’s obligations under the same terms. It is important to note that if fiança includes a benefit of order clause, the creditor must first attempt to collect from the principal debtor before proceeding against the guarantor.
Whether real or personal, collateral package are essential part of credit transactions. By shielding the creditor from the consequences of default, they significantly enhance the enforceability of claims and the likelihood of full recovery.
