KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Backgrounds and Purposes

▶ Changes in an individual's heavy debts and an application for individual rehabilitation procedures

○ During the COVID-19 pandemic, the number of applications for individual rehabilitation procedures has increased along with a heightened sense of crisis due to personal excessive debt.

○ The fact that an individual bears the accumulated heavy debt cannot be regarded as a matter of the individual only. This is likely to spread to problems of the family and society, which are communities.

▶ The purpose of this is to confirm the sustainability of the individual rehabilitation system through ex post legislative and qualitative evaluations in connection with the government's national goal of ‘warm companionship, a country where all are happy’.

○ The purpose of this study is to analyze whether the individual rehabilitation system is being operated in accordance with the legislative background and purpose, and to identify the tasks for improvement of laws and systems.

○ It can bear fruit for the government’s national tasks of ‘realization of a society where no one is left behind and a society where all can live together’ and ‘enhancement of economic vitality through innovation of the regulatory system’.

 

Ⅱ. Major Content 

▶ Basic Analysis of the Individual Rehabilitation System

○ The individual rehabilitation system reduces the social and economic disadvantages of individual debtors due to the declaration of bankruptcy.

- The individual rehabilitation system performs the functions of social security, the role of social safety net, the role of providing incentives to economic activities, and the function of leading to sustainable productive forces.

○ The individual rehabilitation procedure is an individual reconstruction procedure. The individual bankruptcy procedure is a liquidation type procedure for an individual.

- For individual rehabilitation procedures, the income earned by the debtor in the future shall be used as the financial resources for repayment. For personal bankruptcy procedures, the assets held at the time of the bankruptcy shall be used as the financial resources for repayment.

○ The individual rehabilitation system is a legal debt settlement system in the court. Private debt settlement (or individual workout) for the financial debt settlement of an individual debtor based on the Microfinance Act and the Credit Recovery Support Agreement concluded with a creditor financial company.

- An individual debtor may choose a system that is advantageous to them from their own point of view.

○ According to the public data of the Korean Supreme Court as of August 2024, the Seoul Rehabilitation Court received the largest number of individual rehabilitation cases, and the proportion of the repayment plan approved out of the total cases was about 60%.

- In 2020 and 2021, when the COVID-19 pandemic is at its height, the number of applications for individual rehabilitation procedures shows a decreasing trend, but in 2022 and 2023, it shows a rising trend again.

- Comparing with the above, the rate at which the repayment plan was finally approved increased (81%) in 2020 and 2021, but fell sharply to 71% and 61% in 2022 and 2023, respectively.

○ Under Japan’s individual rehabilitation system, if an individual rehabilitation debtor continues to repay according to the individual rehabilitation plan, in principle, it is not necessary to dispose of personal property. There are no restrictions on employment or residence during individual rehabilitation procedures. individual rehabilitation includes small-scale individual rehabilitation and salaried income earner rehabilitation.

○According to Chinese law, bankruptcy includes liquidation type and reconstruction type, and rehabilitation belongs to reconstruction type bankruptcy. There is no Act on Individual Rehabilitation that extends throughout China.

- On the one hand, China’s individual rehabilitation system is being implemented on a pilot basis in regional special economic zones. On the other hand, there are also legislative proposals related to the individual rehabilitation system.

○ Chapter 13 of Title XI of the United States Code relates to the debt settlement of individual rehabilitation schemes. In September 2022, the Consumer Bankruptcy Reform Act was proposed. Pursuant to this bill, Chapters 7 and 13 of Title XI of the United States Code are repealed and Chapter 10 is newly established.

- According to Chapter 10, a private debtor may be discharged from its obligations by fulfilling its minimum payment obligation on the basis of its assets and income, and an individual debtor who is not obligated to make a minimum payment may be discharged immediately. Amended the types of debts that provide housing protection for individual debtors and which can be discharged in case of bankruptcy. An individual debtor may be discharged from debts pursuant to Chapter 10 once every six years.

○ The German Insolvency Act was revised in December 2020 and shortened the exemption procedure for remaining obligations from 6 years to 3 years. Special requirements, such as guaranteeing procedural costs or meeting minimum satisfaction requirements, are waived. If an individual debtor has been approved for exemption of remaining obligations for 11 years before or after the application for commencement of insolvency 

   procedures, or if an individual debtor has been denied exemption of remaining debts for 5 years before or after the application for commencement of insolvency procedures, the application for exemption of remaining obligations is not allowed.

▶ A survey of experts on individual rehabilitation

○ In relation to legislative evaluation, in order to diagnose the individual rehabilitation system, inspect and confirm the effectiveness of the system, and identify practical improvements to the system, the opinions of experts (judges, lawyers, and judicial scriveners) who have direct experience with the current status of operation and problems of the individual rehabilitation system are essential.

○ Key items in expert survey for qualitative evaluation

- Performance of the individual rehabilitation system

- Abuse or misuse of the individual rehabilitation system

- Whether there are differences between jurisdictional courts, and if so, how to reduce the differences

- Matters that need to be amended in terms of the systemic consistency of the individual rehabilitation system

-Matters to be institutionally supported in order to continue the performance of the repayment plan of the individual debtor

- If the individual rehabilitation procedures are abolished, the need to improve the system for the protection of individual debtors.

- Matters that need to be improved, such as the possibility of expanding the beneficiaries of the simplified rehabilitation system or the relaxation of requirements

-Advantages and Disadvantages of Individual Rehabilitation System Compared to Debt Settlement System under the Microfinance Act

- Other tasks that need to be strengthened in terms of procedures and systems

▶ Legislative Evaluation of the Individual Rehabilitation System

○ The individual rehabilitation system can verify the achievement of the legislative purpose through various data. Furthermore, the constitutional conformity can be confirmed through the precedents of the Constitutional Court (evaluation of legal norms).

- In the event that a rehabilitation procedure is initiated for a high-value individual debtor, the provision that allows the debtor's administrator to terminate the bilateral contracts that are not being performed by both parties is justified and is an appropriate means to achieve this purpose by helping the debtor's economic reconstruction and by balancing the interests of all rehabilitation creditors.

- The provision of a claim that is not listed in the list of creditors for individual rehabilitation as one of the grounds for not having the effect of a decision on exemption pursuant to individual rehabilitation procedures is to protect creditors whose claims are to be forfeited due 

  to not being entered in the list of creditors. Excluding receivables that are recognized and which the debtor has in bad faith omit from the list of creditors is an appropriate means to this purpose.

○ Regardless of the frequency of using the individual rehabilitation system under the Debtor Rehabilitation and Bankruptcy Act, the fact that there are individual debtors who continue to use this system is one of the important reasons for the existence of the individual rehabilitation system (evaluation of effectiveness).

- Among the cases of abuse and  misuse of the individual rehabilitation system, it is most remarkable that some individual debtors deliberately conceal their property or falsely report their debts and property to unfairly benefit from the system.

-Due to the cost, complexity, and procedural difficulties of the individual rehabilitation system, it is difficult for those who actually need use and help in the individual rehabilitation system to receive the benefits or advantages.

- Even after individual debtors have their debts discharged or reduced through individual rehabilitation, there are cases where they are unable to repay their debts and face financial difficulties again.

- Rather than the expression of abuse of the individual rehabilitation system, the moral hazard of the individual debtor may become a problem, and the part needs to be supplemented.

○ On the one hand, the individual rehabilitation system is necessary in that it can satisfy the creditor's bond satisfaction to some extent. On the other hand, individual debtors can escape from the negative effects of creditors' debt collection on economic activity and social activities, and can move toward an economic comeback from the burden of excessive overdue interest (equity evaluation).

- If the individual rehabilitation system is abolished, the hopes of individual debtors for an economic recovery will be greatly reduced, conflicts with creditors may increase, the burden of debt will increase, and applications for individual bankruptcy procedures may increase, and the importance of the institutional social safety network will become more important.

- It should not be forgotten that the individual rehabilitation system itself is an important legal and institutional social safety network.

▶ Task of improving the individual rehabilitation system

○ Improvement Tasks Taking Into Account the Results of the Expert Survey

- Resolving discrepancies in the handling of cases by competent courts

- Prevention of abolition of individual rehabilitation procedures and protection of individual debtors after abolition

- Flexibility of the repayment plan

- Establishment of criteria for liquidation value calculation

- Expansion of simplified rehabilitation procedures

○ Other improvement tasks

- Need for protection against preservative measures and compulsory execution and the standards therefor

- Legal suspension of debt repayment required

- Unification of entry into debtor relief system

 

Ⅲ. Expected Effects

▶ Contributing to the development of the individual rehabilitation system, it plays a major role in further strengthening the social safety net that can simultaneously respond to the coming crises and opportunities.

○ Contributing to the improvement and innovation of legal systems and policies by converging personal rehabilitation data and the insights of related experts to identify and analyze not only visible but also inconspicuous issues.

○ Spreading the right awareness of the individual rehabilitation system