COVID-19 Economic Downturn... Ministry of Justice Lowers Threshold for 'Personal Rehabilitation'

Application Debt Limit Raised from 1.5 Billion KRW to 2.5 Billion KRW... "Reflecting 15 Years of Currency Value Changes and Calls for Realization"

[Image source=Yonhap News]

[Asia Economy Reporter Baek Kyunghwan] From now on, it will become easier for individuals facing bankruptcy crises to apply for personal rehabilitation. As bankruptcies among small business owners and self-employed individuals increased due to the prolonged COVID-19 pandemic, the government decided to significantly raise the debt limit required for personal rehabilitation applications to enhance the possibility of recovery.

According to the legal community on the 20th, the Ministry of Justice will immediately implement the Debtor Rehabilitation Act, which raises the debt limit for personal rehabilitation applications from the current 1.5 billion KRW to 2.5 billion KRW.

Personal rehabilitation is a system that reduces or discharges a debtor's debts without requiring creditors' consent and has the advantage of a faster procedure. While general rehabilitation requires repayment over 10 years, personal rehabilitation allows debt discharge after only 3 years of repayment. Bankruptcy, on the other hand, involves distributing the debtor's assets to creditors and eliminating remaining debts, but rehabilitation is more advantageous for recovery than bankruptcy.

However, personal rehabilitation was difficult to pursue because the debt limit for application was low. To apply for personal rehabilitation, the total debt must not exceed 1.5 billion KRW, including 500 million KRW in unsecured debt and 1 billion KRW in secured debt.

This is also why there have been criticisms that the debt limit for personal rehabilitation applications has not been adjusted for 15 years since the Debtor Rehabilitation Act was enacted in 2006, despite the growth of the domestic economy. While bankruptcy applications surged from 45,642 cases in 2019 to 50,379 cases in 2020, personal rehabilitation applications decreased from 92,587 cases in 2019 to 86,551 cases in 2020. A Ministry of Justice official explained, "We reflected the argument that it is necessary to realize the value considering the decrease in currency value over more than 15 years."

The raised debt limit is now a total of 2.5 billion KRW, including 1 billion KRW in unsecured debt and 1.5 billion KRW in secured debt. For example, a self-employed person A who has a 1 billion KRW mortgage loan could previously only apply for bankruptcy or general rehabilitation, but now can apply for personal rehabilitation. Under the previous standard, A could only choose general rehabilitation, which requires creditors' consent and monthly repayments over 10 years, or bankruptcy, which involves liquidating all assets.

The legal community also expects an increase in debtors choosing personal rehabilitation over bankruptcy or general rehabilitation. A lawyer in Seocho-dong predicted, "As the support scope has expanded to help self-employed individuals who were judged economically unable to recover due to lack of creditors' consent to stand up again, the number of conversion applications from those currently undergoing general rehabilitation is expected to rise significantly."

The Ministry of Justice and courts plan to continue researching and introducing support measures for the economically vulnerable related to insolvency. Earlier this month, the Supreme Court announced plans to subdivide insolvency case reception and processing statistics by industry, scale, debt amount, and liquidation value to establish a prompt processing system tailored to each situation. This measure responds to ongoing criticisms that debtors face excessive or unnecessary burdens due to the complex rehabilitation and bankruptcy processes.