“End the endless debt cycle for debts of 50 million won or less”... Government moves to curb practice of extending statute of limitations on long-term delinquent claims

[Financial News] Going forward, for banks to have small claims of 50 million won or less recognized as bad debts, they must allow the statute of limitations to expire on the date originally set.
Financial authorities expect this measure to end the practice of financial institutions transferring unpaid debts to companies specializing in nonperforming loans, which then pass the claims on to loan companies. The aim is to help debtors who endure collection efforts for long periods. At the same time, the plan is to prevent moral hazard by allowing the statute of limitations to be extended if a debtor’s concealed assets are discovered.
A conditional bad-debt recognition system aimed at improving the financial sector’s practice of extending statutes of limitations will take effect on the 12th. On the 9th, financial authorities said that when a financial institution applies for bad-debt recognition for an individual’s delinquent claim, recognition will be granted on the condition that the statute of limitations expires on its originally scheduled expiration date. Introduced under revised Detailed Rules on the Recognition of Bad Debts on Financial Institutions’ Claims, the system applies to individual small delinquent claims of 50 million won or less at banks and insurers, and 30 million won or less at savings banks and specialized credit finance companies, among others.
Under the “Plan to Strengthen Management of Individual Delinquent Claims” announced in February, the Financial Services Commission and the Financial Supervisory Service have been working to reduce repeated collection efforts on long-term delinquent claims. The aim is to ease the collection burden on debtors and support their swift economic recovery.
Previously, if a financial institution classified a delinquent claim with little chance of recovery as an estimated loss and obtained bad-debt recognition from the Financial Supervisory Service, it could have the claim recognized as a loss under the Corporate Tax Act even before the statute of limitations expired. It was noted that after obtaining recognition, institutions could repeatedly extend the statute of limitations through payment orders and other means, retain long-term delinquent claims for extended periods, and continue collection efforts. Bad-debt recognition is a procedure financial institutions use to exclude a claim from tax calculations on the basis that it is unlikely to be collected anyway.
Under the revised Detailed Rules on the Recognition of Bad Debts on Financial Institutions’ Claims, financial institutions can obtain bad-debt recognition for an individual’s unsecured delinquent claim on the condition that they allow the statute of limitations to expire on its scheduled expiration date or waive the claim.
An extension resulting from the borrower’s repayment, among other things, is an exception. Extensions of the statute of limitations will otherwise be permitted only in exceptional cases when unavoidable circumstances arise, such as the discovery of a debtor’s concealed assets. Exceptional grounds for an extension include the discovery of concealed assets, cases in which the statute is unavoidably interrupted under the law, such as during bankruptcy or rehabilitation proceedings, and compliance with debt-restructuring arrangements made through the Credit Counseling and Recovery Service or by the financial institution itself.
If a financial institution sells a claim subject to conditional bad-debt recognition, it must specify the scheduled expiration date of the statute of limitations and the obligation to let it expire in the claim sale agreement, in accordance with the Guidelines on Debt Collection and the Sale of Loan Claims, revised last August. The original creditor financial institution must monitor and report whether the assignee fulfills its obligations.
The revisions will apply starting with financial institutions’ fourth-quarter applications for bad-debt write-offs. When applying for a write-off, financial institutions must separately identify claims subject to conditional expense recognition on the application.
Meanwhile, revised best-practice standards for managing statutes of limitations in each financial sector will also take effect. Procedures for financial institutions to manage claims subject to conditional expense recognition have been clarified. A new review process has been introduced for claims whose limitation periods have been extended: three years after an extension, the borrower’s ability to repay will be reassessed, and if the borrower is deemed unable to repay, the claim may be waived before the statute of limitations expires.
[email protected] Park Mun-su Reporter