Currently in national legislation there are two institutes, one older and one more recent, whose effectiveness is apparent, but which are little used.

We are talking about “Civil Insolvency” and the “Over-indebtedness Law”. The similarity between both is that they apply to individuals, and the difference is that one (civil insolvency) is used in the vast majority of cases for credit recovery and the other (over-indebtedness) for debt restructuring.

Civil insolvency occurs when a person's debts exceed the value of his/her assets (art. 955 of the Civil Code), and it is provided for in art. 748 to art. 786-A of the 1973 Code of Civil Procedure, since the new Code kept its provisions unchanged (art. 1,052 of the Code of Civil Procedure).

This institute, as stated, is a highly effective alternative to default, since the consequences for a person declared insolvent are painful, since the declaration of insolvency is equivalent to an interdiction of the individual, whose assets will be under the custody and management of an administrator appointed by the competent Judge, and will be used to pay all creditors whose credits will be gathered in the same process to be settled with the assets that are collected, until all of the debtor's obligations are fulfilled.

Furthermore, the Code of Civil Procedure establishes a period of 5 years before all obligations of the indebted person are declared extinguished. In other words, a person who is declared insolvent may remain prevented from managing their own assets for 5 (five) years, for example.

The legislation provides for a specific procedure for declaring insolvency, which can be initiated by a creditor or by the debtor himself, and works in a similar way to a bankruptcy process.

However, although insolvency can be requested by the debtor himself, if he is planning to renegotiate his debts without suffering more painful consequences, an alternative is the Over-indebtedness Law (Law No. 14,181/21), which introduced into the Consumer Defense Code a procedure similar to a judicial recovery (art. 54-A to 54-G and art. 104-A to art. 104-C).

The main premise of this law is to protect over-indebted consumers, guaranteeing prior protection, as it defines, for example, limits for financial institutions to grant loans, avoiding excessive debt, as well as an alternative for consumers already affected, through a procedure in which they can bring together certain creditors in order to renegotiate their debts.

This process is more accessible and simpler than the judicial recovery process, it does not require the presence of a judicial administrator, and the debtor himself presents a payment plan to the creditors, which must also observe some rules, such as a maximum term of 05 years for payment and as long as it does not compromise his income too much, guaranteeing him the existential minimum.

On the other hand, the law excludes from this tool debts related to taxes, as they do not arise from a consumer relationship, debts contracted intentionally, without the intention of making the payment, and debts arising from credit with real guarantees, real estate financing and rural credit.

If the debtor's liabilities are largely comprised of debts excluded from the procedure provided for in the Consumer Protection Code, civil insolvency appears as an alternative as it has no limitations in this regard.

It is important to note that the law on over-indebtedness did not change or extinguish civil insolvency, despite what is provided for in art. 1,052, as they are institutes with different premises and rules, and the Consumer Defense Code itself establishes the distinction (paragraph 5 of art. 104-A).

Civil insolvency, being an older institution, has already been widely debated and has few controversies regarding it. Over-indebtedness and its rules will certainly be the subject of discussion in the legal sphere, such as the recent position of the Superior Court of Justice on the jurisdiction of State Courts to analyze cases related to said institution (Conflict of Jurisdiction No. 192,140 – DF).

However, both institutes can be used as useful and effective tools, although it is true that civil insolvency is used as a more effective vehicle for credit recovery, while over-indebtedness is used for consumer protection and recovery of their civil life.

To this end, it is important to always be guided and advised by highly qualified and constantly updated professionals, such as the Mazzucco&Mello office team, which is prepared to meet the most diverse demands related to the topics in question.