"Passage of Personal Debtor Protection Act May Shrink Operations of Secondary and Tertiary Financial Sectors... Vulnerable Borrowers Pushed Outside the System"

Banking Law Association Policy Seminar on "Issues and Challenges of the Personal Debtor Protection Act"
"Legal Enforcement Risks Infringing Debt Collection Companies' Property Rights," Criticized
Arbitrary and Ambiguous Concepts... Violation of the Principle of Proportionality

Recommendations to Supplement the Bill Including Debtor's Repayment Ability Review
Also Anticipated as a System Necessary for Debtor Rehabilitation

Concerns have been raised that the Personal Debtor Protection Act, which regulates financial companies such as debt collection agencies to reduce the burden of delinquency and debt collection on vulnerable borrowers, may shrink the business activities of secondary and tertiary financial sectors and encourage vulnerable borrowers to leave the formal financial system.

At the policy seminar on "Issues and Tasks of the Personal Debtor Protection Act (Act on the Management of Personal Financial Claims and Protection of Personal Financial Debtors)" held on the 17th at the Korea Chamber of Commerce and Industry in Jung-gu, Seoul, hosted by the Bank Law Association, Professor Kim Daegyu of the Department of Legal Administration at Seoul Digital University explained, "If regulations are tightened through the Personal Debtor Protection Act during a high-interest period when savings banks and card companies offer loan products approaching the maximum interest rate, it will not only shrink the business activities of the secondary and tertiary financial sectors but also cause a 'regulatory paradox' that pushes vulnerable borrowers outside the formal financial system." He added, "The Personal Debtor Protection Act increases regulatory costs, but the current statutory maximum interest rate system restricts reflecting the increased regulatory costs in business operations, which will shift the burden onto consumers."

The Personal Debtor Protection Act, submitted to the National Assembly in December 2022 as a government bill, aims to reduce excessive delinquency and debt collection burdens on debtors and protect their rights. It grants debtors the right to request debt adjustment and suspension of debt collection and includes provisions for interest exemption. After a legislative notice in March this year, it is currently pending in the National Assembly's Political Affairs Committee.

There are also claims that granting debtor rights could excessively infringe on the property rights of debt collection companies. Professor Ko Dongwon of the School of Law at Sungkyunkwan University, who presented at the seminar, pointed out, "Whether to exempt interest should be decided by mutual agreement between creditor and debtor. If interest exemption is enforced by law, it may infringe on the creditor's property rights." He noted that lowering the price of claims, which should be determined by supply and demand principles, could negatively affect the market.

Regarding the provision limiting the number of debt collection contacts (prohibiting more than seven contacts within seven days), he criticized, "The criteria for regulated debt collection contacts are ambiguous, and unavoidable contacts such as voluntary debtor contacts are also included in the count," adding, "This could excessively infringe on the business activities of debt collectors and may raise issues of violating the principle of proportionality." In this regard, Lee Jungmin, a research fellow at the Korea Financial Consumer Protection Foundation, suggested, "Referring to the U.S. Fair Debt Collection Practices Act, only telephone contacts should be counted as debt collection contacts, and in the case of debt collection via electronic media, debtors should be provided with a way to opt out of communication media."

Experts emphasized the need for careful review to ensure that this bill does not induce moral hazard among debtors. Professor Choi Cheol of the Department of Consumer Economics at Sookmyung Women's University stressed, "Debtor protection legislation should be pursued to resolve individuals' lack of bargaining power or information asymmetry," adding, "It should not be a system that encourages moral hazard among debtors or undermines market sustainability." Professor Kim also criticized, "The bill arbitrarily applies criteria to classify individuals with debts of 30 million won or less (principal basis) as vulnerable borrowers needing protection, but it is necessary to more thoroughly consider the debtor's financial situation, credit, and repayment ability."

The expected effects of implementing the Personal Debtor Protection Act were also mentioned. Im Hyungseok, senior research fellow at the Korea Institute of Finance, stated, "If the introduction of the right to request debt adjustment for individual debtors activates private debt restructuring, it could serve as a turning point for debt collection companies to shift their goal of managing non-performing loans from 'maximizing short-term recovery' to 'maximizing mid- to long-term recovery,'" adding, "It is necessary to support the activation of debt collection companies' own debt adjustment programs by diversifying debt adjustment methods." The research fellow also argued, "Once the law is enacted, it will greatly help protect individual debtors by alleviating debt collection distress and preventing an increase in debt burden," and countered, "In this regard, interest exemption is a necessary system for the debtor's recovery, and the possibility of individual debtors abusing it is low."