Lawyers warn proposed bill restricts court-ordered debt payments

The proposal establishes a tiered repayment system based on the size of a government’s outstanding precatório stock relative to its previous year’s RCL. If the total debt amounts to up to 15% of the RCL, the government must allocate 1% of its RCL annually to precatório payments. For debts between 15% and 25%, the allocation rises to 1.5%, scaling up progressively to 5% for debts exceeding 85% of RCL.

Under current law, valid through 2029, governments are required to deposit one-twelfth (1/12) of their RCL annually to cover precatório payments.

Felipe Sarmento, acting president of Brazil’s National Bar Association (OAB), said the organization is prepared to challenge the PEC in the STF “to defend the rights of lawyers, businesses, and any individuals with precatórios owed by the state.”

Vitor Boari, chair of OAB São Paulo’s Special Committee on Precatórios, confirmed that the state chapter is preparing to file an injunction request if the PEC is enacted. Among lawyers, the proposal has been dubbed the “default PEC.”

“Before the vote, we warned that the substitute text contradicted multiple STF rulings on the same issue,” Mr. Boari said. He noted that the São Paulo city government currently allocates R$4.8 billion annually to precatório payments, which would fall to R$2.4 billion under the new scheme. “If they can’t clear the backlog with R$4.8 billion, they certainly won’t with R$2.4 billion, which is why the PEC includes a ten-year review clause — but that won’t fix the problem,” he said.

Gilberto Perre, executive secretary of the National Front of Mayors (FNP), argues there is no constitutional violation. “We are applying the legal concept of the ‘reserve of the possible,’ meaning the state must operate within the limits of its finite resources. This cap gives governments predictability and planning capacity,” Mr. Perre said.

He noted that precatórios are imposed by the Judiciary, leaving municipalities without control over the amounts, which can unexpectedly strain budgets. Without a payment cap, Mr. Perre warned, essential services could deteriorate, and municipal investment capacity would be impaired.

Mr. Perre also defended the PEC as a long-term solution that would prevent Congress from repeatedly passing stopgap measures to extend payment deadlines. “This is the most intelligent and organized approach we’ve seen to tackle this issue,” he said.

Tax law experts have also criticized changes to payment discount rules and indexation. Currently, creditors can accept up to a 40% discount for early payment; the PEC removes this ceiling. It also modifies how precatórios are adjusted for inflation. “They are trying to forcibly erode precatório values over time,” Mr. Boari said.

States and municipalities have already benefited from precatório repayment extensions under constitutional amendments 30 (2000) and 62 (2009), both partially overturned by the STF. Amendment 30 allowed debts to be paid over ten years but was ruled unconstitutional in 2010. Amendment 62 established a special repayment regime of up to 15 years, which the STF declared unconstitutional in 2013 but partially upheld through 2020 after modulating the decision’s effects.

“STF rulings have consistently made it clear that no rule enabling indefinite payment of these debts will stand,” said Marco Antonio Innocenti, partner at Innocenti Advogados and head of the Precatórios Studies Commission of the São Paulo Lawyers Institute. Innocenti warned that the PEC risks sending an already managed debt into complete disarray.

“When the STF strikes down a rule, it is removed from the legal system and cannot be reintroduced by Congress, not even via constitutional amendment,” Mr. Innocenti argued, stressing that this is a well-established precedent affecting individual creditors.