[Jeon Daegyu's 7 Wins 8 Losses] The Dilemma of Exercising the Right to Refuse in Personal Rehabilitation Proceedings

Mr. Kim graduated from university, got a job, and got married. However, he reached a point where he could not repay the student loan he took out during university and the bank loan for purchasing an apartment with his salary. Therefore, Mr. Kim decided to use the personal rehabilitation procedure to settle his debts. Before applying for the personal rehabilitation procedure to secure housing stability, he gifted the apartment to his wife. Afterwards, Mr. Kim applied to the court for the personal rehabilitation procedure, and the procedure was initiated. The bank considers the apartment gift to be an act harmful to creditors and is contemplating countermeasures.

If Mr. Kim had not applied for the personal rehabilitation procedure, the bank could exercise the creditor’s avoidance right. The creditor’s avoidance right refers to the right to cancel a disposition of property made by the debtor with the intent to harm creditors and to restore the property to its original state. The creditor bank can file a lawsuit for creditor’s avoidance against Mr. Kim’s wife to cancel the gift and restore the apartment to Mr. Kim.

However, if Mr. Kim applies for the personal rehabilitation procedure, the bank cannot exercise the creditor’s avoidance right. This is because once the personal rehabilitation procedure begins, creditors cannot exercise their rights individually. Instead, the “Act on Debtor Rehabilitation and Bankruptcy” provides a system of avoidance rights. The avoidance right refers to the right to deny the effect of acts (fraudulent acts) committed by the debtor before the initiation of the personal rehabilitation procedure with knowledge that they harm creditors, and to recover the diverted property after the procedure begins. It is similar to the creditor’s avoidance right that creditors can exercise before the personal rehabilitation procedure begins. The difference is that the creditor’s avoidance right is exercised by the creditor, whereas the avoidance right is exercised by the debtor.

Since the subject exercising the creditor’s avoidance right before the personal rehabilitation procedure begins is the creditor, there is no particular problem in exercising it. However, once the personal rehabilitation procedure begins, the subject exercising the avoidance right is the debtor, and since the party who committed the fraudulent act is also the debtor, it is difficult to effectively exercise the avoidance right. Although the rehabilitation trustee can participate in exercising the avoidance right and creditors can assist in the avoidance lawsuit, this is not a definitive solution. Institutional improvements are needed.

First, considering that the repayment period in the personal rehabilitation procedure is three years and that it is difficult to conclude an avoidance lawsuit within three years, there is a method, as in Japan, of not recognizing the avoidance right. If the debtor commits a fraudulent act, the repayment plan can be disapproved or discharge denied.

Next, the rehabilitation trustee can be authorized to exercise the avoidance right. The rehabilitation trustee is a person who, under the supervision of the court in the personal rehabilitation procedure, investigates the debtor’s financial situation, supervises the execution of the repayment plan, and performs duties to ensure that the personal rehabilitation procedure proceeds properly and smoothly. Allowing the rehabilitation trustee to exercise the avoidance right has the advantage of enhancing the effectiveness of exercising the avoidance right. However, the long duration of avoidance lawsuits and the fact that the rehabilitation trustee is supervised by the court are problematic. Additionally, whether it is appropriate for the rehabilitation trustee, who is a court employee (currently most rehabilitation trustees are court clerks), to conduct litigation, and how to resolve the lack of litigation experience and workload are also obstacles.

Finally, as in the United States, appointing a trustee to exercise the avoidance right is an option. Since the trustee is an independent third party, the effectiveness of exercising the avoidance right can be increased, but issues such as who will be the trustee and who will bear the costs arise.

As a practical approach, considering the special nature of the personal rehabilitation procedure, it is reasonable either not to recognize the avoidance right or, even if recognized, to allow creditors to exercise it. Since creditors have a direct interest, effective exercise of the avoidance right can be expected.

Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court