The stake could be worth up to $439 million (1.7 billion reais) if the sale includes the platform that Recovery uses to price loans, said the source, who asked not to be identified.

Without that, the price tag would be in the region of 800 million reais.

BTG Pactual and Lone Star declined to comment.

BTG Pactual, Latin America's largest independent investment bank, is selling assets to raise cash in the wake of the arrest of its founder André Esteves. Brazil's Federal Supreme Court ordered the release of the billionaire on Thursday.

As many as 23 firms had shown preliminary interest in Recovery, the source said. Interested parties had a Wednesday deadline to submit non-binding proposals but it was not clear how many did so.

According to a second source, who requested anonymity because negotiations were underway, Lone Star executive Matt Meredith came to Brazil to sign the agreement.

The remaining stake in Recovery is held by the World Bank's International Finance Corp and the company's founders from Argentina.

Recovery oversees about 50 billion reais in distressed debt loans and is a major buyer of bad credit from Brazil's biggest financial institutions.

With unemployment spiking and inflation eroding disposable income, Brazilian households are defaulting on loans at the fastest pace in six years. Toxic debt is also increasing for companies amid flagging sales and rising borrowing costs.

Industry players estimate sales of toxic loans will rise 40 percent this year to more than 25 billion reais.

Distressed debt companies acquire a large portfolio of credit from a bank at a steep discount and then rework each loan individually, profiting after repackaging them into securities, taking over the collateral or restructuring them. For banks, bad-loan sales help them clean up their balance sheets in times of economic hardship.

(Editing by Lisa Shumaker)

By Tatiana Bautzer and Guillermo Parra-Bernal