Sale of Expired Debt Claims to Loan Companies to Be Prohibited

Financial Services Commission to Prepare Amendment to the Personal Debtor Protection Act
Move to Prohibit Sale of Claims After Statute of Limitations Expiry
Supreme Court Ruling Spurs Legislative Reform Efforts

As early as next year, it is expected that claims for which the statute of limitations has expired will no longer be able to be sold to loan companies. Loan claims are subject to a five-year statute of limitations, after which debtors are no longer obligated to repay. However, financial companies have been selling such claims to loan companies, and these companies have revived the statute of limitations by utilizing the 'ex officio order' system to pursue collection. As this practice has become problematic, financial authorities have decided to draft relevant legislation themselves.

According to financial authorities on August 1, the Financial Services Commission plans to prepare a revision to the “Personal Debtor Protection Act” reflecting these measures in the second half of this year. This follows up on a field meeting held on July 29 to review the management of overdue claims.

The reason the Financial Services Commission is moving to amend the law is that, unlike during the lending process, debtors’ rights are not adequately protected at the delinquency stage. One representative example is the “statute of limitations” system. Under current law, if five years pass after a loan is made, the statute of limitations is established, and the debtor’s obligation to repay disappears.

If an individual borrows money from a bank or a credit card company and fails to repay, the financial institution sells the overdue claim at a discount to a non-performing loan (NPL) subsidiary or a loan company. Even claims for which the statute of limitations has expired can be sold in this process.

The price loan companies pay for such overdue claims is typically within about 5% of the principal loan amount. Their business model is profitable as long as they recover even a portion of the debt from delinquent borrowers. To do so, loan companies file for a “payment order” against the debtor in court; if the debtor does not contest, the statute of limitations is extended by 10 years. In this way, debtors can become trapped in a cycle of debt.

According to the Financial Services Commission, as of May this year, there were about 920,000 individuals in default on financial obligations, an increase of 70,000 compared to last year. Although debt adjustment programs are available to help escape long-term delinquency, the number of long-term delinquent borrowers continues to rise because individual debtors are often at a disadvantage in terms of legal knowledge and resources.

The Financial Services Commission has long considered amending the Personal Debtor Protection Act to prohibit the sale of claims for which the statute of limitations has expired, but has repeatedly faced obstacles. The Court Administration Office has consistently opposed such changes, citing Supreme Court precedents.

The background for the Commission’s renewed push for legal reform is a Supreme Court precedent issued on July 24. The ruling stated that even if a debtor partially repays a debt after the statute of limitations has expired, it cannot be uniformly presumed under civil law that the debtor has waived the benefit of the statute of limitations. Until now, the Supreme Court had ruled that debtors had waived this benefit, but this new decision reverses a precedent that had stood for 58 years.

An official from the Financial Services Commission stated, “Financial companies can correct unreasonable practices through administrative guidance, but loan companies will not comply unless there is a legal basis. Since it is not possible to prohibit the payment order system itself, we will prepare a legislative amendment within the year to prohibit the sale of overdue claims for which the statute of limitations has expired.”