South Korea's financial authorities are set to reform the practice of debt collection for personal delinquent loans, which has allowed financial companies to continue pursuing debts even after receiving tax benefits. Under the new rules, financial institutions must complete the statute of limitations before they can claim tax benefits for recognizing personal delinquent loans as losses.
On June 10, the Financial Services Commission and the Financial Supervisory Service announced a pre-notification of the revised "Guidelines for the Recognition of Bad Debts by Financial Institutions." This revision follows the measures announced in February to strengthen the management of personal delinquent loans, with plans to finalize the changes in July and implement them in September.
Currently, financial companies can classify personal delinquent loans as estimated losses and apply for recognition from the Financial Supervisory Service, allowing them to receive tax benefits even before the statute of limitations expires. The issue arises when these companies continue to extend the statute of limitations and pursue debt collection after receiving tax benefits, effectively demanding repayment from debtors for debts that are recognized as uncollectible under tax law.
The recent controversy surrounding the "Sangnoksoo" case has heightened awareness of this issue. Sangnoksoo First Special Purpose Company was established in 2003 as a private bad bank to manage large amounts of non-performing loans during a credit crisis. However, it has been revealed that the company has held long-term delinquent loans for over 20 years while continuing collection activities, raising concerns about outdated debt management practices.
The core of the revised guidelines is that financial companies can only receive recognition for bad debts on unsecured personal loans when the statute of limitations for the initial debt expires. According to the newly established "Conditional Recognition of Personal Financial Claims" regulation, financial institutions must abandon the claim by the expected expiration date of the statute of limitations when applying for or reporting bad debt recognition.
The initial focus will be on small delinquent loans. Personal financial claims held by banks and insurance companies will be targeted if they are below 50 million won, while savings banks, mutual finance institutions, and credit finance companies will focus on claims below 30 million won. The financial authorities noted that these thresholds cover over 90% of all claims based on the number of accounts. However, exceptions will be made if hidden assets of the debtor are discovered or if bankruptcy, rehabilitation procedures, or debt adjustments necessitate a suspension of the statute of limitations.
Financial authorities also plan to ensure that the obligation to complete the statute of limitations continues during the debt sale process. When selling debts for which tax benefits have been received on the condition of statute completion, the sales contract must specify the expected expiration date of the statute of limitations and the obligation to complete it. The authorities will also monitor and report on whether the buyer fulfills this obligation.
Additionally, a system will be established to report and disclose the debt adjustment performance of each financial institution, key details of debt sales, and the status of statute completion. The financial authorities plan to revise the "Guidelines for Debt Collection and Loan Sales" in July and update the "Best Practices for Managing Statutes of Limitations" by industry in August to improve the management system for delinquent loans.
* This article has been translated by AI.
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