The number of credit defaulters and application for individual rehabilitation are growing rapidly these days. The rehabilitation systems are divided into two parts; the private and the public system. This paper mainly compares individual rehabilitation in public with personal workout system in private. The two systems have a common goal of helping credit defaulters recover credit by adjusting their debts. However, the workout system deals with the debt of financial institutions while the debt between individuals is included in individual rehabilitation. Meanwhile, individual rehabilitation is operated by Debtor Rehabilitation and Bankruptcy Act. Nevertheless the law has some problems, for example, there is no compulsory measure to compel creditors to provide information. So solutions are in need to improve the system and this paper suggests four improvement methods.
Individual rehabilitation helps debtors because the debtor is exempt from the rest of the debt but such measures may infringe the creditor’s right. Therefore, it is to be remembered that individual rehabilitation is not only for debtors but for unification of society.
Recent soaring of annual household debt gave rise to concern that circumstances resembling the credit card situation of 2002 may occur. According to the statistics, the scale of household debt in the third quarter of 2013 was 991 trillion 7 million won) and this is more than two times than the 439 trillion won at the end of 2002. The era of 1000 trillion in household debt has arrived. Moreover, the number of credit defaulters who could not pay the debt was around 3.62 million at the end of December in 2004), and it is approximately 15.5% of the economically active population totaling about 23 million.
Because credit defaulters cannot do normal financial transactions, they have been neglected and have become a major cause of deepening the polarization of society. There is growing interest in using the personal credit recovery system to help these people.
Credit recovery system has two aspects in that personal credit recovery performs the role of a social safety net by providing opportunities for debtors who owe excessive amount to rehabilitate economically while weakening the debtor’s willingness to reimburse. In other words, credit recovery system contains a possibility to bring about moral hazard and to prevent such situation, a credit recovery system which upholds proper balance between the debtors’ benefit and the creditors’ benefit is important especially in light of fixing reasonable credit utilization practices and maintaining the nation’s fiscal health.
Therefore, this paper seeks to analyze the current individual rehabilitation and compare it with the personal workout system which is one of the systems that represent the private credit recovery system. This paper also seeks to figure out the system’s problems and suggest some realistic solutions that complement with the existing system in order to minimize such problems.
Ⅱ. Theoretical consideration of personal credit recovery system
- Significance of personal credit recovery support system
Personal credit recovery system is a general term for institutional strategies that help debtors beyond redemption to recover credit or grant extensions. In addition, personal credit recovery system is based on the debtor’s willingness to pay. This basis suppresses the occurrence of moral hazard on the part of the debtor and can be a way of attaining social unification and security by helping debtors escape from economic decline.
- Types of Koreanpersonal credit recovery system
The government enforced multiple policies to solve the problems that arose when bad credit became an issue. The existing private system, includes a personal workout system enforced by each financial institution, bad bank, Credit Counseling and Recovery Service. Along with this, the present public system contains individual rehabilitation and bankruptcy system.
This paper focuses on individual rehabilitation in the public system and uses personal workout system within the private system to compare the two.
Ⅲ. Public credit recovery systems: focused on individual rehabilitation
- Significance of public system (centering on “Debtor Rehabilitation and Bankruptcy Act”)
(1) Background of the introduction of the system
Many companies went bankrupt in the midst of the financial crisis in the year 1997 and insolvent enterprises and financial institutions have been restructured ever since. This made financial institutions revolve around individuals rather than enterprises. In order to stimulate national economy, the government encouraged reckless credit card issuance and personal debt increased drastically due to such measure. The number of defaulters grew rapidly and the increase in defaulters became a serious social problem. For this reason, strong legislation is needed to help these people.
(2) Change and content of the system
In 1962 the government established bankruptcy legislation but the law was merely nominal before the first exemption ruling in 1997. As Korean law substantially referred to Japanese law at the time, bankruptcy law and harmony law were separated just like Japanese law. This structure proved to be inefficient and Debtor Rehabilitation and Bankruptcy Act was enacted in 2006 as a united credit recovery system.
Debtor Rehabilitation and Bankruptcy Act is separated by three court processes. The law is composed of important three procedures; rehabilitation procedure (part 2), bankruptcy procedure (part 3) and individual rehabilitation procedure (part 4).
- Comparison between ‘individual rehabilitation’ and ‘personal workout system’ )
To analyze clearly, this paper compares ‘individual rehabilitation’ in the public system with the ‘personal workout system’ which is the most typical of the private system.
(1) Qualifications to apply
1) Individual rehabilitation
The debtor gets regular and secure income (continually or repeatedly) as a personal debtor who is insolvent or has a possibility to become insolvent. To add to this situation, the debtor can apply to begin the recovery procedure when the total amount of the debt is under five hundred million in case of an unsecured debt or under one billion in case of a secured debt. When the applicant meets the qualification and reimburses regularly for three to five years, the applicant is exempt from the rest of the debt.
2) Personal workout system
This system is for individuals who do not repay the debt by the due date and the total amount is under five million. To add to this situation, the debtor should provide qualifications that he earns more than the minimal cost of living or he should seem to be able to repay the debt when examined by the commission. But individuals who receive credit recovery support or apply repeatedly for personal workout system within a considerable period of time and applicants found to be unqualified by the commission’s decision are excluded.
(2) Examination procedure
1) Individual rehabilitation
An individual debtor is able to apply for individual rehabilitation at the start of court procedure. The applicant needs to write the name of the debtor, the resident registration number, address, purpose and cause of the application and the debtor’s property and debt to fill out the application form.
The court has a right to grant a preservative measure upon the debtor’s property by its own authority or by the application of a person concerned before individual rehabilitation procedure commences. In addition, the court has a right to order a suspension until there is a decision regarding the application to start an individual rehabilitation procedure. The court overrides the application due to problems with the document, cost, time limit and so on.
2) Personal workout system
A debtor who applies for personal workout has to pay the application cost. Credit Counseling and Recovery Service informs the credit institution to submit reports and suggestions about the bond within one week after Credit Counseling and Recovery Service accepts the application form and the credit institution needs to submit materials about the debtor to the commission within two weeks after there was notification from the commission. The commission is able to request for supplementation and, if the request is not carried out, reject the application.
The commission has to notify both the creditor institution and the debtor of the contents of deliberation and decision within one month as long as it does not extend the deliberation period due to unavoidable circumstances. The commission should notify the creditor institution of the decision within a week from the decision and the creditor institution has to inform the commission about whether to agree the decision. The decision of the commission is confirmed by the consent of 2/3 of the amount of secured claim and the consent of majority of the amount of unsecured claim. Within the period of the term, the credit institution is deemed to have consented to vote whether you do not notice it or not.
The credit institution is considered to have consented if it does not inform about the question of consent. In case the institution does not agree, the commission readjusts the repayment plan by reconciling the debtor’s needs and the creditor’s opinions.
In individual rehabilitation procedures, in terms of implementation, the law helps the debtor repay the debt by giving some respite. Depending on the type of debt, the debt includes not only liabilities of credit institutions but also liabilities between individuals.
Within the personal workout system, in terms of implementation, each financial institution buys a certain percentage of the debt or grants respites and makes the debtor pay back in installments. The workout system aims for the debt of financial institutions in terms of the type of debt.
The two systems have a common goal of helping out credit defaulters by enabling them to recover credit by debt adjustment. The debtor is able to repay the debt with his income in accordance with the system. In other words, the systems reduce moral hazard and encourage debtors to repay the debt on their own. These measures offered by the system advocate social unification.
Ⅳ. Problems and solutions of individual rehabilitation
Nonmonetary institutions except for the first financial institution receive from fifty thousand to three hundred thousand as the issuing cost of debt certification. This can be a burden for debtors. In addition, the credit institutions hold the debtor’s debt in a certain period of time and they often sell the debt to other credit institutions so that the debtors cannot find his debt when he applies for individual rehabilitation The law only stipulates that the creditor “should respond” if the debtor requests for materials related to the creditor and there is no compulsory measure.
- Case of abuse
The debtor owes some financial institutions on purpose to apply for individual rehabilitation. The reason is because it is possible for government to write off the debt except for minimum cost of living. So the system may induce the debtor to borrow more money.
On the other hand, the creditor may refuse to issue debt certification and exclude the debtor from the creditor list on purpose. After that, the creditor might transfer credit and the transferee would urge the debtor to pay again after the debtor gets the decision of bankruptcy or exemption. As discussed, the system may be used in many bad ways.)
- Improvements through changes in individual rehabilitation
(1) Improvement of the current procedural law
The supervisory institution needs to prohibit the credit institution from receiving excessive issuing cost from debtors and encourage the credit institution to provide information when the debtor wants to get it. Compulsory measures like imposing fines are needed for the system to be viable.
Articles 643 to 660 of Debtor Rehabilitation and Bankruptcy Act include penal provisions to prevent law evasion of the law but it is abstract and not enough to prevent such evasions.
(2) Rationalization of the repayment period
It is desirable for the redemption period to be adjusted elastically according to the repayment capacity of the debtor to help the debtor’s healthy economic revival. The redemption period needs to be clarified in the law to prevent the debtor from becoming the creditor’s slave because the debtor may become a slave if repayment takes too long. In the United States, the repayment plan over five years is forbidden because this is regarded as slavery. However, there is no need to shorten the redemption period uniformly and thus the period only needs to be adjusted elastically.
(3) Simplifying the application procedure
Debtor Rehabilitation and Bankruptcy Act should require stating the relationship between individual rehabilitation, bankruptcy and personal workout system and unify the procedure clearly.
(4) Classifying debtors
There should be some distinctions between debtors since broadly there are two sorts; some suffer from hardships in life while the rest overspend. The system should be used to induce the latter to change bad habit and repay the debt with his earnings.
Recently, with the number of credit defaulters increasing drastically, applications for individual rehabilitation are pouring in. In this situation, systematic complementation and improvement on legislation are very important. The government should keep up the research for various systems and compare several credit recovery systems. It is necessary for the government to choose some effective systems and improve them by research.
Individual rehabilitation is useful for debtors with excessive debt since the system gives a chance to revive economically by extending the redemption period or reducing the burden. However, the creditor cannot help enduring relative disadvantage and this seems unfair for creditors. Therefore, the challenge of how to harmonize the interests between the creditor and the debtor remains. Evidently, individual rehabilitation is not just for debtors but for unification of society.
- Base element
김용철(2006), 개인회생절차의 현황과 문제점
민형석(2009), 우리나라 신용회복제도에 대한 연구
박형준(2005), 개인채무자회생제도의 소개
이영호(2006), 농어촌에서의 개인회생제도 문제점 및 개선방안
이은영(2008), 국가별 개인신용회복제도의 비교 및 시사점
- News article
[가계부채 진단]⑥ 맏형 은행이 나서고 개인회생제도 개선해야, <조선일보>, 2012.01.05
kr/news/1162193 (last visited January 10, 2014)
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