What exactly reduces the level? For example, I played without defeats, with a minimum of corruption, but the engram slots were taken away from me 5 times.If you lose and get continually assaulted, Innocent Gear will break; keep losing and you will receive cursed and locked items. Keep losing even more and Amane's body gets so corrupted that she indeed regresses, level after level.
If you're stuck in a losing loop, like it happened to me once, you can get down all the way back to level 1, with no weapon or gear: you're essentially a slave for eternity and the game is lost. No choice at that point but to start again and train for better stats before facing those renegades...