The Financial Services Commission announced that the newly legislated Personal Credit Management and Debtor Protection Act (“the Act” hereinafter) will go into effect from October 17. The new legislation passed by the National Assembly at the end of last year was promulgated in January this year, and the Enforcement Decree of the Act was also approved by the government at the cabinet meeting held on October 15, paving the way for implementing the law from October 17.
Background
So far, the personal delinquent debt management system has been largely dependent on the public sector-driven debt workout process made available through the Credit Counseling and Recovery Service (CCRS) and the court’s bankruptcy proceedings, instead of having financial companies taking preventive steps beforehand by entering into negotiations with individual debtors. In this regard, the primary focus of financial companies has been maximizing their debt collection by delegating the function of debt collection activities to third parties or selling off debt to credit businesses. When debtors fail to make repayments on schedule, they become easily exposed to the growing burden of interest payments, which places them at risk of falling into long-term delinquency and facing excessive burden over debt collection.
Against this backdrop, the Act was enacted in January this year for implementation from October 17 to help prevent defaults in a preemptive manner, thereby minimizing social costs associated with personal delinquency, and to seek an appropriate balance in terms of the rights and obligations of financial companies and debt collectors on the one hand and individual debtors on the other.
In this regard, the Act and its subordinate regulations mainly deal with the following provisions—(a) establishing a legal ground for financial companies to provide debt workout service of their own to individual debtors, (b) easing excessive interest burden on late payments, (c) strengthening rules on the sale of debt, and (d) making improvements to debt collection practices that are deemed to be disadvantageous to debtors.
Key Details
First, personal debt workout service provided by financial companies will be more widely available.
A new debtors’ right will be established to enable debtors who have borrowed less than KRW30 million and accrued late payments to request personal debt workout directly from financial companies. Financial companies will be required to notify debtors about their right to ask for debt workout prior to taking actions for collecting debt, which may result in significant changes to the rights and obligations of debtors, such as an event of default, housing auction, and transfer of debt.
In addition, financial companies will be required to establish and observe their own internal standards on debt workout to prevent perfunctory review of applications and promote consistency. From the time of debt workout request being filed, financial companies should notify debtors within ten business days about their eligibility.
Meanwhile, to prevent moral hazard on the part of debtors, financial companies will be able to turn down debt workout request in certain cases—for instance, if a debtor fails to follow instructions for submitting supplementary documents for three times or more. However, even when declining a request, financial companies should inform debtors about the availability of court’s personal bankruptcy proceedings and individual debt workout service offered by the CCRS. In addition, even after entering into a debt workout agreement, when the debtor fails to abide by the agreed upon repayment schedule for three months or longer, financial companies may cancel the agreement. In special circumstances, such as hospitalization and loss of employment, financial companies can cancel the agreement after six months of failed payments.
Second, excessive interest burden will be eased on late payments.
For those who have borrowed less than KRW50 million, the ways in which interest is charged on overdue loans will be improved. Currently, in the case of a default before maturity, late payment interest is charged even on the principal that is not overdue until the maturity. However, under the Act, even in the event of default, financial companies will be prohibited from charging additional late payment interest on the principal that is not due yet.
In addition, financial companies will be able to transfer charged-off debt or debt that is deemed to be unrecoverable only if they indicate in contract their intention to relinquish their claim for future interest.
Third, there will be stronger rules regarding the sale of debt by financial companies to strengthen protection for debtors.
Financial companies will be prohibited from transferring debt that has dubious creditor- debtor relationship and also from engaging in sale of debt in a perfunctory and recurring manner. Transferring of debt that has entered into a debt workout agreement will be prohibited, so as debt that has been transferred for three times or more previously. These measures are expected to help strengthen protection for debtors and more effectively shield them from the risk of facing increasingly heavier burden of debt collection and falling prey to illegal debt collection activities.
Fourth, there will be a set of specific restrictions placed on excessive debt collection practices, which will help to guarantee debtors to maintain a normal life. The restrictions include the following—(a) prohibiting debt collection attempts for debt that has already entered into a workout program, (b) restricting the maximum number of debt collection attempts (calls or visits) to seven times in seven consecutive days, (c) allowing suspension of debt collection attempts for a certain period of time (maximum three months) if an unavoidable event took place, such as a natural disaster or an accident, and (d) enabling debtors to request debt collectors not to contact them via specific method or channel at certain hours of the day.
Grace Period
The FSC plans to grant a three-month grace period from October 17, 2024 until January 16, 2025 to make sure that this new legislation can take root successfully. After reviewing the progress of the implementation, the FSC may consider extending the grace period for additional three months. While the authorities will refrain from resorting to sanctions during the grace period, intentional violation or gross negligence of the law, violations leading to serious loss of property to debtors or causing market disruption, and failure to comply with corrective orders given by the authority will still remain subject to sanctions.
Further Schedule and Expectation
The FSC will set up and operate a taskforce to oversee and support a successful implementation of this legislation. The taskforce will closely monitor progress and seek improvements along the way to swiftly respond to the needs on the ground.
With the implementation of this legislation, the FSC expects that the rights and interests of debtors will be more thoroughly protected with increased possibility for them to recover and regain footing financially. Financial companies are also expected to reap the benefits of enhanced values in recoverable debt. Once the provision of personal debt workout becomes more widespread from financial companies, the public sector-driven debt workout programs operated by the CCRS and the court’s bankruptcy proceedings can concentrate more on providing debt workout solutions to those delinquent debtors who have multiple and/or long-term debt accounts, while financial companies serve as the primary source of debt workout provider for their own customers. This will make debt workout more widely available in the society, helping to prevent larger defaults and minimize social costs associated with them.
* Please refer to the attached PDF for details.