Personal bankruptcy

Personal bankruptcy (개인파산/個人破産) is referred to the proceedings that a court declares an individual bankrupt subject to the relevant law. A debtor who does not have foreseeable income enough to be eligible for credit recovery cannot help applying for personal bankruptcy. It is to provide some form of debt relief to debt-ridden individuals. Personal bankruptcy is distinguished from corporate bankruptcy.

For example, in the United States, the same chapters of the Bankruptcy Code are applied in both personal and corporate bankruptcies. Most individuals who enter bankruptcy do so under Chapter 13 (a "reorganization" plan) or Chapter 7 (a "liquidation" of debtor's assets). More rarely, personal bankruptcy proceedings are carried out under Chapter 11. The ultimate goal of personal bankruptcy, from the viewpoint of the debtor, is receiving a discharge.

In Korea, personal bankruptcy proceedings are regulated by Chapter 4 (Articles 579-627) of the Act on Debtor's Rehabilitation and Bankruptcy (hereinafter the "Act" 채무자 회생 및 파산에 관한 법률/債務者回生法).

Key words
personal bankruptcy, insolvency proceedings, credit delinquent, debt workout, credit recovery

Personal bankruptcy in Korea
In Korea, individual debtors who do not repay their debts on schedule are referred to as "credit delinquents" (신용불량자/信用不良者), because most debts were accrued due to credit extended by financial institutions. Credit delinquents are defined as debtors who did not repay debts of at least KRW 300,000 for three months or more. Once a person was registered as a credit delinquent, financial institutions halted all transactions with him or her.

The number of credit delinquents in Korea has been growing steadily since the IMF Crisis in 1997. The number presumably began at approximately 800 thousand in 1998, and reached 3.7 million by 2003 accounting for 8.4 percent of the South Korean population (forty-five million).

The government initiated several support programs, but the number of credit delinquents has decreased very slowly. In order to allow for successful recovery of credit delinquents, it is imperative to reduce debts in a more comprehensive manner, to clear the impediments for easy use of personal bankruptcy mechanisms, and to provide incentives to encourage debtors to make progress on their repayment plans.

While there has been much change in terms of learning to live with bankruptcy as an inevitable part of a market economy, there is still much to be done. The reality of "moral hazard" in bankruptcy discharge should be uncovered. Legal restraints discriminating against bankrupts must be removed.

The repayment period of individual rehabilitation and individual workouts must be shortened to three years. Personal guarantors for debtors in rehabilitation proceedings should be protected as much as the debtors are during the repayment period in rehabilitation proceedings. Debtors need to be able to keep their mortgaged residences during the proceedings.

The history of insolvency has shown that society can benefit as much as or more than debtors themselves from the discharge of unpaid debts because with a fresh start the debtor has an incentive to work hard. The starting point to personal bankruptcy law reform is this belief.

Statutory ground
Initially, the Personal Debtor Rehabilitation Act (개인채무자회생법/個人債務者回生法) was first enacted in March 2004 (Act No. 7198) and implemented for the period from September 23, 2004 to March 31, 2006, to handle efficiently the personal bankrupcy cases. As the Act on Debtor's Rehabilitation and Bankruptcy came into force on April 1, 2006, those provisions of the repealed act were incorporated into the Act.

Personal bankruptcy proceedings are regulated by Chapter 4 (Articles 579-627) of the Act.

Part 4. Personal Rehabilitation Proceedings
 * Chapter 1. General Provisions
 * Chapter 2. Start of Personal Rehabilitation Procedure
 * Chapter 3. Rehabilitation Committee Members
 * Chapter 4. Confirmation of Personal Rehabilitation Claims
 * Chapter 5. Repayment Schedule
 * Chapter 6. Closing and Discharge

Personal debt workout program
Recently growing number of people are applying for court-mediated debt workout programs after falling into heavy debt in the midst of economic slump. The global financial crisis in the years 2007-08 prompted many middle-class workers who got laid off to start their own businesses. But many of these ventures have failed and they are falling on hard times again.

The increase in applicants for debt workout is sending huge ripples across Korean society because it shows just how many people are dropping out of the economically active population. Unlike personal bankruptcy filings, which involve indebted individuals with no income, debt workout program applicants are unable to service their debts even though they have steady incomes. Some of them are eligible for on-going credit recovery.

A growing number of businesses are also feeling the pinch. According to the Seoul court, 122 companies applied for court-mediated debt workout programs as of June 30, 2013, compared to 190 for all of 2011. Companies that were on the edge of bankruptcy after the 2008 global financial crisis have already gone belly-up. Now bankruptcies have spread to mid-sized businesses. It feels like a dyke protecting our economy has broken.