[The Dark Side of COVID-19 Recovery] Personal Bankruptcy Up 8.9%... "Courts Must Actively Use Discretion"

"Personal Bankruptcy and Rehabilitation Applications to Increase Early Next Year"
Despite 30-Day Bankruptcy Declaration Rule... Seoul and Regional Courts Show Different Case Processing Speeds

#. Mr. Choi Hyuk-su (alias), a man in his 30s, was seriously injured while working last year as the COVID-19 pandemic worsened, causing his work to stop. Despite struggling by barely eating ramen and carrying a loan debt of 90 million KRW, he lost his ability to repay due to no income. Upon a friend's recommendation to seek personal bankruptcy discharge, Mr. Choi turned to the rehabilitation court.

#. Ms. Han Hee-sook (alias), a woman in her 40s who had been repaying her debts for a year after applying for personal rehabilitation, recently experienced a deterioration in health due to a rare incurable disease. Preparing to apply for basic living security benefits, she thought it was impossible to pay more installments and applied to the court for special discharge as well. As the local district court’s decision is delayed, Ms. Han’s sighs grow deeper.

Although recovery to normal life has begun after about two years of the COVID-19 crisis, the number of personal debtors at bankruptcy and rehabilitation courts is not expected to decrease easily. According to the Supreme Court on the 22nd, from 2020 to 2021, when COVID-19 spread in earnest, an average of 49,721 personal bankruptcy applications were filed annually nationwide. This is an 8.9% increase compared to 45,642 cases in 2019. In particular, last year’s personal bankruptcy applications filed at the Seoul Rehabilitation Court numbered 10,873, the highest in the past five years.

Baek Ju-seon, president of the Korea Bankruptcy and Rehabilitation Lawyers Association, predicted, "The number of applicants will increase further in the second half of this year or next year." He said, "With the government’s COVID-19-related support and various grace measures likely to stop, combined with the rising interest rate phase, the number of personal debtors, especially self-employed individuals pushed to their limits, will inevitably surge."

The rise in housing prices has ironically become an obstacle to rehabilitation. Attorney Lee Yong-ho of Law Firm Yulbit, active in Daegu, pointed out, "In rehabilitation cases, there must be repayment exceeding the liquidation value by converting owned assets into cash. If there is no immediate cash flow but the price of a single owned real estate has risen so much that the monthly repayment amount reaches several million KRW, many people cannot afford repayment." He added, "The court has sometimes reflected the official land price first by using private real estate appraisal firms when considering liquidation value, but with the trend toward realizing official land prices, even this has become limited."

The legal community also pointed out the issue of the rehabilitation court’s case processing speed. According to Judge Kim Ki-hong of the Seoul Rehabilitation Court, who recently published a paper titled "Relief for Personal Debtors in the COVID-19 Crisis," among 45,082 personal bankruptcy cases nationwide from March 2020, when COVID-19 spread domestically in earnest, to February last year, only 793 cases (1.7%) were processed within one month, and only 13,963 cases (31%) were processed within three months. Related regulations stipulate that "the court must decide whether to declare bankruptcy within 30 days from the date of the bankruptcy application unless there are special circumstances."

While about 77% of cases filed at the Seoul Rehabilitation Court are processed within three months, other regional courts showed variations due to excessive workload and manpower shortages. Currently, the Seoul Rehabilitation Court is the only specialized rehabilitation court in South Korea; other regions handle insolvency cases through bankruptcy divisions within district courts.

Attorney Lee said, "Jurisdictional courts are not arbitrarily chosen but designated based on residence, etc. From the personal debtor’s perspective, it would be better if the same result came out faster, but there is a big speed difference between courts." Kwon Jae-sung, lead attorney at Law Office OneTop in Incheon, said, "Seoul processes cases faster, but in the provinces, work tends to pile up, so it takes more time."

At the end of last year, the Supreme Court’s Rehabilitation and Bankruptcy Committee suggested that "it is urgent to establish additional infrastructure capable of rapid and professional responses to the excessive debts of companies and individuals" and recommended adding more rehabilitation courts.

For this reason, voices are calling for courts to actively use their discretion to help personal debtors. Judge Kim emphasized, "Under the Insolvency Act, courts have broad authority to exercise their powers or discretion. Depending on the court’s active role, debtors can return to economic activities more quickly, at lower costs, and more successfully."

Judge Kim explained, "Regarding personal rehabilitation, it is necessary to specifically examine the causes of non-performance, such as whether the debtor suffered financial difficulties due to the COVID-19 crisis, and to considerably postpone the dismissal of the rehabilitation procedure after approval. For personal bankruptcy, it is necessary to broadly allow litigation support and actively consider 'waiving liquidation' of bankruptcy assets necessary for livelihood and basic living, taking into account the debtor’s age, asset status, and types of assets."

Attorney Kwon said, "From the creditor’s perspective, it may be better to relieve the debtor’s burden through rehabilitation procedures and recover some money. In the COVID-19 situation, many debtors fail to repay due to reasons beyond their control, so I think it is right for courts to make more decisions considerate of debtors."

President Baek added, "The Seoul Rehabilitation Court revised its practical guidelines to support personal debtors related to COVID-19. If other courts nationwide operate the system with a similar perspective, it will greatly help our society overcome disasters."