Major Issues for Debt Collection in Four Latin American Markets

Collecting a foreign debt in Latin America can be challenging. Periodically, one is faced with major issues which complicate debt collection.

Below are four of Latin America’s biggest markets and major issues that may arise attempting to collect a debt on behalf of a foreign creditor.

Debt Collection in Argentina: Currency Issues

Argentina debt collectionArgentina’s economy has gone through several cycles the last few decades and the country has faced a deep economic crisis. Two of the major issues creditors and debtor have had to deal with are currency devaluation – the value of the Argentinean Peso dropping substantially as against the US Dollar – and foreign currency exchange restrictions as imposed by federal government. These two issues are interrelated and have negatively affected each other, resulting in considerable payment issues for debtors in Argentina, uncollectible claims for foreign creditors, and red flags for global creditor insurers because of negative credit rates.

Debt Collection in Brazil: the Challenge of the Economic Crisis

Brazil debt collectionConsidered one of the most influential emerging markets and part of the so called BRIC nations, Brazil experienced impressive economic growth and a rise in overall prosperity at the beginning of the 21st century. However, it fell into a severe economic crisis in 2014, from which it is currently still recovering. The Brazilian currency, the Real, devaluated as against the US Dollar and several businesses went bankrupt or otherwise have had difficulties paying outstanding invoices to foreign creditors.

Debt Collection in Mexico: Informality and Challenging Legal System

Mexico debt recoveryOne of the most open economies of Latin America, Mexico has passed through the global financial crisis that started in 2008, relatively unharmed. In fact, its economy has been growing for the last few decades and is considered an emerging market with great opportunities for foreign investors and traders. However, the challenges for foreign creditors in Mexico are the level of informality in daily business, as well as it’s malfunctioning legal system. These factors make debt collection in Mexico a challenge from time to time, and legally enforcing a foreign claim impractical and virtually impossible.

Debt Collection in Venezuela: Hyperinflation and Currency Exchange Controls

Venezuela debt collectionVenezuela has unfortunately been hit by one of the most severe economic and monetary crises of the century. Hyperinflation has lead to a collapse of the local currency, the Bolivar. Foreign currency exchange restrictions have made it almost impossible for local businesses to buy US Dollars, Euros or other foreign currencies. In combination with the collapse of the Bolivar, this has made it virtually impossible for local debtors to pay foreign creditors. Venezuela is one of the most difficult nations on earth for debt collection and a foreign debt can in most of the cases, by default and as a rule of thumb, be considered uncollectible and a certain write off.

Looking at respectively Argentina, Brazil, Mexico and Venezuela, we notice that the following are some of the major issues debt collection faces: currency devaluation, foreign currency exchange restrictions, economic crisis, informality, malfunctioning legal system, and hyperinflation. Most of these major issues, through the last decades, have manifested, to a lesser or larger extent, in all the countries mentioned and many other countries in Latin America and will likely continue to affect debt collection in the future.

David Zannoni

If you are a foreign creditor and interested in learning more major issues for debt collection in Latin America, please reach out to Cobroamericas, on Linked-In or follow us on Twitter.

To participate in conversations about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.

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Debt Collection in the Informal Economy

118_1896With the informal economy I refer to doing business without a formally established company or whereby a person does business on its own account without being registered to do business; and / or business is done without or with (very) few and / or insufficient contracts, invoices, order forms, or otherwise official documentation in place.

Now I have always found this a hard nut to crack, debt collection in the informal economy. Perhaps this is less of an issue in North America or Europe (or at least Northern Europe), but in Latin America and the Caribbean where the size of the informal economy is considerable and where it forms an indispensable way of life, the informal economy is also in the debt collection business part of reality.

But how do you collect debts in if there is no formal basis to rely on? Here are four things to focus on.

1. Commercial relationship

Perhaps there is little to no legal basis to sustain a collection claim. However, in the informal economy, like in formal economy, business is done on the basis of a commercial relationship. In order to determine your chances of success in collecting outstanding debts, it is crucial to determine how important the business relationship is or might be in the future to your debtor. And if for your debtor there is still an interest in maintaining or improving the commercial relationship, because your debtor wants to continue doing business with you (as it needs your products or services) there is leverage to collect.

2. Reputation

There might not be a formal business, but your informal debtor may have a commercial reputation in its industry it wants to keep up with. That reputation can be harmed if it becomes known in the business that it defaults on payments. If can trigger your debtor to pay in order for the debtor to keep its reputation in good standing.

3. Financial resources

Just as in the formal business world, also in the informal economy businesses go through financial ups and downs. The debtor can be in financial tough waters, but may still be committed to pay its debts. if this is the case, the approach should be to be realistic, patient and solution-minded and settle amicably for a payment plan with monthly installments or, perhaps even look for one time settlement payoff. you will the end be (at least partially) compensated for the outstanding debt, the commercial relationship may be saved, and debtor is given the opportunity to sort out and solve its financial problems.

4. Solving disagreements

Perhaps the reason debtor is not paying is a dispute or disagreement regarding commercial and / or financial terms. The less is put on paper, the more room for interpretation of business terms, and the more likely it is that there will be disagreement, disputes, and renegotiations on the way. Quality issues, problems with delivered materials, service level performance issues, different interpretation of terms, differences in business culture or languages, it can all contribute to default on payments. Again, the approach should be solution-minded. Try to negotiate settlement payments in combination with re-establishing the commercial terms and dealing with the outstanding issues. Perhaps this is a good moment to put as much on paper as possible to avoid similar issues in the future…

Debt collection in the informal economy might not be on the basis of potential legal support of the claim. However, debt collection in the informal economy can be effective by focusing on the following: the importance of the commercial relationship, reputation of the debtor, financial resources on your debtor’s end and solving disagreements between the parties.

If you are interested in learning more on the subject of debt collection in the informal economy let’s connect on Linked-In or follow me on Twitter.

To participate in conversations about debt collection in Latin America please join the Linked-In Group Debt Collection Latin America.