Financial Companies Must Let Statute of Limitations Expire on Individuals' Delinquent Debts for Bad-Debt Recognition... 'Endless Collection' Curbed

From the fourth quarter: applies to debts of KRW 50 million or less at banks and insurers
KRW 30 million or less at savings banks and specialized credit finance companies
Limits repeated extensions of the statute of limitations; extended claims also

Going forward, financial companies will be eligible for bad-debt recognition on individuals' unsecured delinquent claims only if the statute of limitations expires or they waive the claims. Financial regulators are putting a stop to the practice of repeatedly extending the statute of limitations on delinquent claims and continuing collection efforts over long periods.

The Financial Services Commission and the Financial Supervisory Service announced on October 12 that they would implement amendments to the Detailed Rules on the Recognition of Bad Debts on Financial Institution Claims. The amendments follow up on the "Plan to Strengthen the Management of Delinquent Claims Against Individuals," announced in February. Their key feature is a shift in the principle for managing delinquent claims to "expiration of the statute of limitations as a rule, with extensions permitted only in exceptional cases."

Until now, financial companies could classify delinquent claims with a low likelihood of recovery as estimated losses and, after receiving bad-debt recognition from the Financial Supervisory Service, claim them as losses under the Corporate Tax Act even before the statute of limitations expired. They could then repeatedly extend the statute of limitations through payment orders and other means, leading to problems such as holding delinquent claims for long periods and continuing collection efforts.

Under the amendments, when applying for bad-debt recognition on individuals' unsecured delinquent claims, financial companies must allow the statute of limitations to expire on the date specified in the application or waive the claims. The rules apply to delinquent claims of up to KRW 50 million at banks and insurers, and up to KRW 30 million at savings banks, credit-specialized financial companies and other institutions.

Exceptions allowing extensions of the statute of limitations include cases in which a debtor's hidden assets are discovered; the statute is interrupted by legally unavoidable circumstances, such as bankruptcy or rehabilitation proceedings; or the debtor is carrying out a debt adjustment through the Credit Counseling and Recovery Service or a financial company's own program.

Even if a financial company sells a claim granted conditional bad-debt recognition, its obligation to allow the statute of limitations to expire remains in force. Under the Guidelines on Debt Collection and the Sale of Loan Claims, revised in August, financial companies must specify in the sale agreement the expected expiration date and the obligation to let the statute of limitations expire. They must also monitor and report whether the transferee that acquires the claim fulfills this obligation.

The amendments will apply starting with applications for bad-debt write-offs in the fourth quarter of this year. At the application stage, financial companies must identify claims granted conditional recognition as deductible expenses and manage whether the statute of limitations expires as required.

Amendments to the industry-specific best-practice standards for managing statutes of limitations, which will take effect at the same time, introduce a reassessment system for claims whose limitation periods have been extended, with the aim of restricting long-term collection efforts. For example, three years after an extension, the debtor's repayment capacity will be reassessed. If the debtor is deemed unable to repay, the claim may be waived even before the statute of limitations expires.

Financial regulators also plan to disclose financial companies' performance in managing delinquent claims. They will publish, through the relevant industry associations, figures for claim waivers, debt adjustments and claim sales by individual financial companies in the banking, savings bank, credit-specialized financial and mutual finance sectors, and plan to release updated figures every six months thereafter.

An FSC official said, "These amendments will provide a foundation for people with long-term delinquent debts to escape endless debt collection and return to normal economic activity. Financial companies are also expected to be able to manage asset quality while reducing the staffing and costs involved in managing delinquent claims."

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