[Jeon Daegyu's 7 Wins 8 Losses] Is This a Matter for the Constitutional Court to Resolve?

Jeon Dae-gyu, Chief Judge of Seoul Bankruptcy Court

The "Debtor Rehabilitation and Bankruptcy Act" (Debtor Rehabilitation Act) is an area where the interests of debtors and creditors sharply conflict. This characteristic of the Debtor Rehabilitation Act greatly influences the enactment of laws and practical operations. When the economy is difficult, legal amendments tend to expand the scope of discharge (debt forgiveness), and courts actively allow discharge for debtors. In response, creditor groups oppose this on the grounds that it causes moral hazard, leading to completely opposite legal amendments and practical operations. This phenomenon is still evident in recent amendments and practical operations of the Debtor Rehabilitation Act.

Since the Debtor Rehabilitation Act was enacted in 2005, the repayment period in individual rehabilitation procedures was maintained at five years, but on December 12, 2017, it was amended to shorten the period to three years. The problem was that the application of the shortened repayment period was limited to individual rehabilitation cases filed after the enforcement date of the amended law, June 13, 2018. Because the application target was based on this date, debtors who applied even one day earlier did not benefit from the shortened period. Some courts granted the benefit of the shortened period to individual rehabilitation cases filed before June 13, 2018, but this was overturned due to opposition from creditor groups. The Supreme Court sided with the creditors in March 2019, ruling that changing the repayment plan to three years without a hearing on the shortened repayment period was illegal.

Subsequently, the debtor side argued for another amendment to the Debtor Rehabilitation Act. The purpose of shortening the repayment period was to allow debtors capable of rehabilitation to return to productive activities quickly, in line with the intent of the individual rehabilitation system. However, treating debtors who applied for individual rehabilitation procedures after June 13, 2018, differently from those who applied (and even received approval for repayment plans) before that date was seen as problematic in terms of fairness.

Accordingly, on March 24, 2020, the Debtor Rehabilitation Act was amended once more. If a debtor who received approval for a repayment plan as of the enforcement date of June 13, 2018, had already performed the repayment plan for three years or more, the debtor could be granted discharge upon the debtor's application or ex officio by the court after hearing the opinions of interested parties (Article 2, Paragraph 1 of the Addenda to the Debtor Rehabilitation Act). Since retroactively expanding the application of the shortened repayment period could undermine creditor trust, this provision allows discharge decisions only for debtors who had received approval before June 13, 2018, and had already performed the repayment plan for three years or more as of that date, upon application or ex officio after hearing interested parties.

The problem lies in the discharge requirement stating "having already performed the repayment plan for three years or more as of June 13, 2018." This wording leaves room for interpretation that it does not apply to those who had performed less than three years as of that date (for example, 2 years and 11 months). Interpreted this way, only debtors who had already performed three years of the repayment plan as of June 13, 2018, are targeted, potentially infringing on the equality rights of those who did not meet this condition. From the creditors' perspective, discharge based on the shortened repayment period amendment of March 24, 2020, may violate the principle of non-retroactivity of laws or infringe on the legitimate expectations of individual rehabilitation creditors.

These concerns are becoming a reality. Currently, court practice recognizes discharge only for individuals who had already performed the repayment plan for three years or more as of June 13, 2018. In response, the debtor side filed a constitutional complaint with the Constitutional Court, arguing that excluding those who had performed less than three years of the repayment plan before June 13, 2018, from the application of Article 2, Paragraph 1 of the Addenda to the Debtor Rehabilitation Act is unfair. It is questionable whether the determination of the addenda's application target should be left to the Constitutional Court. Considering the legislative intent of the amendment for the debtor's swift social reintegration, even if the debtor had not performed three years as of the enforcement date, discharge should be decided once the debtor completes three years of repayment thereafter. The court's passive practical operation is regrettable.