1.

Establishing Different Debtor Protection Programs Based on Size of Personal Financial Claims

The Personal Debtor Protection Act prescribes different obligations for financial institutions when managing delinquencies based on the principal amount of personal financial claims and whether or not the claims are secured.
 

(1)

Principal Amount: KRW 50 Million or More

If the principal amount of the claim is KRW 50 million or more, a financial company must notify the personal financial debtor at least ten business days prior to filing for a court auction of the property where the debtor resides.
 

(2)

Principal Amount: Over KRW 30 Million But Less Than KRW 50 Million

In cases where the principal amount of the claim is more than KRW 30 million but less than KRW 50 million, in addition to the above mentioned notification obligation, a financial company may not receive any default interest payment upon the financial claim that would not have been accelerated had it not been for the debtor’s payment default. For example, if a debtor borrows KRW 35 million for one year and agrees to repay the principal plus interest in equal monthly installments, but defaults on its payment for a given month, the lender would usually accelerate the entire loan and require the payment of default interest on the entire loan. However, under the Personal Debtor Protection Act, although default interest may be imposed upon the monthly installment the debtor has defaulted on, the lender may not impose default interest on the remaining part of the loan, even when the entire loan has been accelerated (normal interests will continue to accrue). Any separate agreement in breach of this provision of the Act will be null and void to that extent.
 

(3)

Principal Amount: Less Than KRW 30 Million and Unsecured

If the principal amount of the claim is less than KRW 30 million and unsecured, in addition to the obligations mentioned above, the creditor: (i) must give notice at least ten business days before if it plans to accelerate the claims, (ii) will release future interest claims in case it transfers personal financial claims that are uncollectable or highly unlikely to be collected, (iii) will not transfer personal financial claims underdoing restructuring that satisfy certain statutory requirements, (iv) must notify the personal financial debtor at least ten business days prior to the transfer of any accelerated personal financial claims, (v) will evaluate the transferee’s collection personnel with respect to its size and expertise when transferring personal financial claims that are in default for at least three months, and (vi) will prepare and implement its “internal standards for claims transfer” policy when transferring personal financial claims. However, if the principal amount of the claim is less than KRW 30 million or the claims are unsecured, certain obligations would not apply, such as limiting the acceleration of claims in case there has been a request for debt restructuring, release of future interest claims and non-transferable claims.
 

(4)

Principal Amount: Less Than KRW 30 Million and Secured

In addition, if the principal amount of the claim is less than KRW 30 million and secured, Articles 31 through 40 relating to a financial company’s debt restructuring program will apply, which we further discuss below.
 

2.

Debt Restructuring Program of Financial Companies

The existing debt restructuring system in Korea has been criticized as being after-the-fact and driven by the public sector, such as the court and the Credit Counseling and Recovery Service. This has led to the introduction of a debt restructuring program provided by financial companies.

Under the Act, personal financial debtors may request the financial company to restructure its debt. Previously, financial companies were under no obligation to consider a debtor’s request for debt restructuring. However, a financial company will now be required to review such request and notify the debtor of its decision within ten business days from the date of receiving such request.

Meanwhile, the Act allows a financial company to refuse debt restructuring in certain cases (i.e., where the debtor fails to respond on three or more occasions to document submission requests for debt restructuring or less than three months have passed since the termination of the debt restructuring agreement). Even if the financial company refuses to accept a debt restructuring request, it should still notify the debtor of the opportunity to go to a court or the Credit Counseling and Recovery Service for debt restructuring.

The Personal Debtor Protection Act stipulates that with respect to debt restructuring, a financial company will (i) not unreasonably refuse or delay the debt restructuring, (ii) disclose information necessary for debt restructuring on its bulletin board and internet homepage, and (iii) consider the debtor’s ability to repay debts, the likelihood and cost of collection of the relevant claims, and the effect on the financial soundness of the financial company. In addition, financial companies are required to establish and implement “internal standards for debt restructuring” that their officers and employees must comply with when performing such tasks.

Once debt restructuring commences, acceleration of claims will be suspended, claims may not be transferred and debt collection activities will be suspended until the debt restructuring process is completed. The terms of the debt restructuring will be deemed to be those reflected in the debt restructuring agreement entered into between the financial company and the personal financial debtor. Such terms will also be applicable to any transferee who subsequently acquires personal financial claims at issue.
 

3.

Restriction on Disadvantageous/Excessive Debt Collection

The Personal Debtor Protection Act stipulates various measures to prevent excessive debt collection practices by financial companies. For instance, (i) collection activities are not allowed in the case of personal financial claims that are being subject to debt restructuring procedures, (ii) collection attempts will not exceed seven times in every seven day-period for each claim, (iii) collection attempts will be deferred for a certain period of time if the debtor cannot be contacted due to disasters or accidents etc., and (iv) there will be certain restriction on collection methods and timing.

In addition, financial companies must establish and implement “internal debt collection standards” that set forth the procedures for conducting collection activities with respect to personal financial claims.
 

4.

Liability for Damages and Sanctions

The Personal Debtor Protection Act enforces the aforementioned measures for personal debtor protection and may impose liability for damages, administrative fines and criminal sanctions.

Specifically, debt collecting companies, among others, would be found liable for damages suffered by personal financial debtors if the damages were caused intentionally or negligently due to violations of laws or regulations while performing their duties. Under such circumstances, the financial company that entrusted the collection to a debt collection agency, etc., shall be jointly liable for such damages, unless the financial company can show that it was not negligent in guiding, supervising and taking the necessary measures with respect to lawful debt collection. A personal financial debtor may seek statutory damages of up to KRW 3 million in lieu of damages claims. This will likely lead to increased civil disputes between financial companies and personal debtors.

The Personal Debtor Protection Act provides that a financial company as well as its officers and employees may be sanctioned for receiving default interest on any loan that has not yet become due and may be subject to an administrative fine in addition to the civil liability. Furthermore, the Act provides that criminal sanctions may be imposed if (i) a person other than a licensed debt collection agency is entrusted with the collection of personal financial claims, (ii) non-transferrable receivables are transferred to a person other than the central or local government, or (iii) a debt collector uses the title “Informant,” “Detective,” or any other similar title when contacting the debtor. Please note that the relevant financial company may also be penalized for such activities under the Act’s dual penalty provisions.