South Korea’s Financial Services Commission (FSC) is implementing comprehensive reforms to address the structural issues in personal delinquent debt management. The current system has led to an increase in long-term defaulters due to practices such as automatic extension of debt expiration and aggressive debt recovery. The reforms aim to shift the focus from maximizing recovery to supporting borrowers’ financial rehabilitation and protecting their rights. These changes are part of the government’s broader strategy for inclusive finance, discussed at the second Inclusive Finance Grand Transition meeting chaired by Vice Chairman Lee Ok-won.
The new measures directly impact financial companies, borrowers with overdue debts, and related stakeholders. Financial institutions will be required to actively facilitate debt adjustment before borrowers lose repayment benefits, making the process more accessible. The reforms also strengthen the responsibility of original creditors to protect customers even after selling delinquent debts, and introduce stricter reporting and transparency requirements for debt sales. Borrowers will benefit from improved access to debt adjustment, reduced risk of credit score drops, and better protection against excessive collection practices.
Implementation began with the policy announcement on February 26, 2024, and includes several phased actions. Financial companies must now notify borrowers of their right to request debt adjustment and follow model guidelines for internal debt adjustment standards. The FSC will evaluate debt adjustment performance and incentivize companies by recognizing principal reductions as losses. Statute of limitations practices are being reformed, with new thresholds for banks and savings institutions, and exceptions for cases involving hidden assets. The government is also working with the Ministry of Justice to amend relevant laws and prevent excessive litigation aimed at extending debt expiration.
Frequently asked questions include: What is the main goal of these reforms? The primary objective is to protect borrowers and facilitate their financial recovery, rather than simply maximizing debt collection. How will debt adjustment become more accessible? Financial companies are now required to inform borrowers of their rights and follow best practices, making it easier for individuals to apply for debt adjustment. What changes affect debt sales? Original creditors must maintain customer protection responsibilities and report details of debt sales to supervisory authorities, reducing risks for borrowers. These reforms are expected to create a more balanced and supportive environment for individuals facing financial hardship.
The Financial Services Commission’s new measures mark a fundamental change in South Korea’s debt management landscape. By focusing on borrower protection and financial recovery, the reforms address the root causes of long-term defaults and reduce the risks associated with aggressive debt collection. The mandatory notification of debt adjustment rights and enhanced oversight of debt sales are practical steps that will benefit both borrowers and the financial sector. These policies are expected to foster greater trust and stability, supporting the government’s vision for inclusive finance.