The government will forgive 16 trillion won in debt for 1.13 million long-term borrowers in arrears. The target is individuals who have not been able to repay debts of 50 million won or less for more than seven years. The government plans to establish a 'bad bank' to buy up arrears debt en masse and initiate prompt debt adjustment.
On the 19th, the Financial Services Commission reported the 'long-term arrears debt adjustment program' to the National Planning Commission. This initiative is part of President Lee Jae-myung's campaign promise for 'debt forgiveness and adjustment due to COVID-19 damage' and aims to provide a chance for recovery to socially vulnerable individuals trapped in long-term debt.
The support target includes individuals (including sole proprietors) who have been in arrears on debts of 50 million won or less for more than seven years. If they do not have any disposable assets below 60% of the median income, their long-term arrears debt will be completely written off. This means their debt will be fully forgiven. Additionally, for borrowers who are deemed to have significantly insufficient repayment ability, up to 80% of the principal will be reduced, and debt adjustments will be facilitated to allow for partitioning repayments over a period of 10 years.
Support will be implemented not by requiring long-term borrowers to directly apply for 'debt adjustment,' but rather through the bad bank acquiring arrears debt in a 'bulk purchase' manner. The bad bank is a specialized institution for acquiring and managing non-performing assets, and the government plans to operate it under the Korean Asset Management Corporation (KAMCO) by establishing a joint-stock company under commercial law.
The Financial Services Commission predicts that this program will purchase long-term arrears debt amounting to 16.4 trillion won, benefiting approximately 1.134 million individuals. The estimated budget required is about 800 billion won (applying average purchasing price of 5% for arrears debt). Of this, 400 billion won will be prepared in the second supplementary budget, while the remainder will be supported by the financial sector. Song Byeong-kwan, head of the Financial Services Commission's Financial Support Division, noted during a background briefing the day before, 'There is generally consensus on (financial companies' funding support),' and added, 'Further discussions are necessary.'
The Financial Services Commission will also strengthen support through the 'New Start Fund,' a debt adjustment program for small business owners and self-employed individuals. It plans to reduce 90% of the principal debt for those with total debt of 100 million won or less and low-income (60% or less of the median income) borrowers in arrears, and to support partitioning repayments over a maximum of 20 years. Currently, the reduction in principal is between 60% to 80% depending on repayment ability, and the maximum partitioning repayment period is 10 years. The Financial Services Commission stated, 'Through the expansion of support under the New Start Fund, a total of 101,000 individuals (debt of 6.2 trillion won) are expected to benefit,' adding that 'the estimated budget is about 700 billion won, which will be prepared through the supplementary budget.'