[Exclusive] CCRS Debt Adjustment to Be Required Before Rehabilitation or Bankruptcy... Legislation Pursued for 'Debt Adjustment Prerequisite Principle'

Included in Financial Fundamental Rights Support Act to Be Proposed in August

Mandatory CCRS Debt Adjustment Before Court-Led Rehabilitation or Bankruptcy

Plan to Establish a Collective Debt Adjustment Body

Legislation is being pursued that would require individuals to first undergo debt adjustment with the Credit Counseling and Recovery Service before entering court-led rehabilitation or bankruptcy proceedings. There are also discussions about establishing a new deliberative body within the Credit Counseling and Recovery Service, similar to the Dispute Mediation Committee of the Financial Supervisory Service, and expanding the scope of debt adjustment from personal debts to include corporate debts as well.

According to sources in the financial and political sectors on June 6, the Credit Counseling and Recovery Service and the Korea Inclusive Finance Agency are working with the National Assembly to enact a Financial Basic Rights Support Act that includes these provisions. On June 12, a launch event for the Financial Basic Rights Research Group will be held at the National Assembly, and a legislative support team centered on lawmakers will be formed, with the aim of submitting the bill in August.

The bill focuses on guaranteeing everyone the minimum right to access necessary financial services. The intention is to institutionally support the right to financial access, based on the constitutional principles of human dignity and value (Article 10) and the right to a life worthy of human beings (Article 34).

Codification of 'Debt Adjustment First Principle'... Concerns Raised Over Restrictions on the Right to Trial

The core of the bill is the codification of the “debt adjustment first principle.” Under this system, debtors would be required to undergo debt adjustment with the Credit Counseling and Recovery Service before filing for personal rehabilitation or bankruptcy with the court. Currently, there are no such regulations, so many debtors go directly to the court process; however, the Credit Counseling and Recovery Service believes that, depending on the situation, private debt adjustment may be more appropriate in many cases.

Eun-Kyoung Kim, President of the Korea Inclusive Finance Agency and Chairperson of the Credit Counseling and Recovery Service, said, “Debt adjustment through the Credit Counseling and Recovery Service allows for customized arrangements based on an individual debtor’s repayment capacity and can significantly reduce both time and costs. A system is needed in which the Credit Counseling and Recovery Service is utilized first, and if resolution is difficult, the case is then referred to the court process.”

The Credit Counseling and Recovery Service’s debt adjustment is a representative private debt adjustment system that supports debt relief, interest rate adjustments, and extension of repayment periods based on agreements between financial companies and debtors. The application fee is around 50,000 won, and some vulnerable groups and unemployed youth are exempted. Processing typically takes less than two months. By contrast, court-led personal rehabilitation requires hiring an attorney or legal professional, resulting in hundreds of thousands of won in costs, and the process can take six months to over a year.

Another advantage is the high acceptance rate among creditor financial companies. The Credit Counseling and Recovery Service’s debt adjustment covers claims from financial companies that are parties to the agreement, and the creditor objection rate is only around 1%.

However, some have pointed out that if the debt adjustment first principle is legislated, it may restrict the constitutional right to trial. For some debtors who may be more suited to personal rehabilitation, the additional procedure could delay relief. There is also strong opposition, as court-led personal rehabilitation involves the court’s compulsory power, can include non-agreement debts, and may offer a greater reduction of principal.

Seoul Rehabilitation Court in Seocho-gu, Seoul. Photo by Yonhap News Agency

Plans to Establish a Deliberative Debt Adjustment Body... Considering a 'Credit Counseling and Recovery Service-Style Dispute Committee'

Separately from legislative efforts, the Credit Counseling and Recovery Service is working to strengthen the effectiveness of debt adjustment by establishing a new deliberative body. Similar to the Dispute Mediation Committee of the Financial Supervisory Service—which mediates disputes between financial companies and consumers with the participation of a deputy governor and outside experts—the Credit Counseling and Recovery Service aims to build a system in which creditors and debtors can engage in professional discussions and reach agreement on adjustment plans. This is often referred to as a “Credit Counseling and Recovery Service-style Dispute Committee.”

As the Lee Jae-myung administration emphasizes reforming “cruel finance” practices by protecting vulnerable groups and alleviating debt burdens, it is expected that efforts to revamp the debt adjustment system centered on the Credit Counseling and Recovery Service will gain momentum.

In the financial sector, there is also speculation that the debt adjustment functions currently divided among Korea Asset Management Corporation (KAMCO) and the Credit Counseling and Recovery Service could be consolidated under the Credit Counseling and Recovery Service. There is a growing view that the scope of the Credit Counseling and Recovery Service’s debt adjustment, which is currently focused on individuals and sole proprietors, should be expanded to include corporations in order to build a more integrated debt adjustment framework. KAMCO has so far handled not only personal but also corporate non-performing loans. Some experts argue that rather than KAMCO’s purchase-based debt adjustment system, which relies on government funds, there is a need to expand private sector–oriented debt adjustment frameworks.

A financial sector source stated, “Transferring KAMCO’s debt adjustment functions to the Credit Counseling and Recovery Service involves comprehensive consideration of the roles of each organization, workforce reallocation, and operational capabilities. Accordingly, it will take considerable time and a process of gathering opinions before substantial progress can be made in discussions.”

This content was produced with the assistance of AI translation services.