This content is from: Local Insights

South Korea

On March 2 2004, the National Assembly passed the Act on Individual Debtor Rehabilitation (the AIDR), to assist individuals in financial difficulty. The AIDR provides for a court-sanctioned rehabilitation program outside the bankruptcy regime to debtors who have a stream of income. Upon the court's approval of the rehabilitation plan, the debtor may reschedule the debt for a period not exceeding eight years. To be eligible, the amount of the indebtedness is limited to W500 million ($435,000) for unsecured debts or W1 billion for secured debts, as further specified by the court rules, and the debtor should show a periodic stream of income.

At present in South Korea there is a private arrangement mechanism similar in nature to the AIDR - the individual work-out plan. The plan also offers debt adjustment and rescheduling to debtors with total indebtedness not exceeding W300 million won. However, being a private arrangement among financial institutions, the plan applies only to individuals indebted to financial institutions that have signed on to the plan. By contrast, the AIDR, although covering a broader scope of debts at a larger amount, may adversely affect the credit history of the debtor, because a petition under the AIDR may suggest that the voluntary arrangement between parties did not work out for the debtor.

Enforcement of a creditor's rights will be voluntarily deferred under the plan, while prohibited or restricted under the AIDR. Other bankruptcy-related provisions also apply to the AIDR proceedings: the power of avoidance, the right of repossession, the right to set aside, the right to set off, and the preferential rights of tenants of residential or commercial real estate for key money deposits.

There have been discussions on whether the AIDR would give individual debtors an incentive to engage in morally hazardous activities. Some practitioners are concerned that the AIDR, by adding uncertainly and additional risk, may have a chilling effect on the secondary market for individual debt, such as that for credit card loans and mortgages, which is expected to blossom with the recent reorganization and expansion of KoMoCo. Others argue that, because of the existence of the plan, the impact will be small at worst.

The AIDR will be effective from six months from the date of promulgation, which has not yet taken place. The AIDR had been part of the draft Insolvency Act, which combines and supersedes the Corporate Reorganization Act, the Composition Act, and the Bankruptcy Act. The draft Insolvency Act is still waiting for the review and approval of the National Assembly.

Hyun Kim

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