Debt Restructuring Includes Wealthy Homeowners and High Earners

As the number of confirmed personal workouts (debt restructuring) approached 100,000 last year, it was revealed that some homeowners with multiple properties and high-income earners were included among those who received debt restructuring due to increased living expenses. Critics argue that broadening the scope of relief to include investment failures and excessive spending could lead to moral hazard.

On June 23, Representative Kim Sang-hoon of the People Power Party reported data from the Credit Recovery Commission, revealing that from 2024 to the first quarter of this year, 1,417 homeowners with two or more properties and 1,272 high-income earners with annual incomes exceeding 80 million won received debt restructuring due to increased living expenses.

This trend is on the rise. The number of homeowners with multiple properties receiving debt restructuring increased from 584 in 2024 to 657 last year, while the number of high-income earners rose from 506 to 622 during the same period. Although they represent a small percentage of the total debt restructuring cases based on increased living expenses, the inclusion of asset holders and high-income earners raises concerns about the program's original intent.

A former member of the Credit Recovery Commission, referred to as A, noted, "There are cases where high-income earners claim they are struggling financially after spending 200 million won on their children's overseas education or facing difficulties due to failed real estate investments. We need to consider whether it is appropriate to recognize debt restructuring for those who incurred debt for investments that resulted in losses."

The issue lies in the fact that the Credit Recovery Commission assesses debtors primarily based on their current repayment ability, making it challenging to distinguish whether loans were used for essential living expenses or for investments and discretionary spending. While the Commission cross-verifies the purpose of loans through documents submitted by debtors, credit information checks, and creditor reports, it does not conduct investigations like a court. This limitation raises concerns about accurately identifying the use of funds when living expenses, education costs, and investment losses are intertwined.

As a result, there is a growing preference for the Credit Recovery Commission's debt restructuring over court-based personal rehabilitation. Courts conduct thorough verifications of assets, income, and transaction histories, while the Commission's process is relatively simpler. According to the Financial Research Institute, personal rehabilitation applications reached around 150,000 last year, while applications for debt restructuring through the Commission exceeded 200,000.

The Credit Recovery Commission explains that it prioritizes current repayment ability and the potential for economic recovery over the causes of debt. A Commission official stated, "In our country, there are many cases where individuals prioritize education expenses for their children, leading to insufficient living expenses and accumulating debt through financial transactions. If someone is in a difficult situation due to investment failures, it is appropriate to provide them with a chance to recover."

However, with the number of personal workout users nearing 100,000, there are calls for a more detailed examination of the causes of debt and the purposes of fund usage. Recently, some rehabilitation courts have also begun to strengthen their review processes by focusing on the submission of false creditor lists, income data, and asset lists while broadening the criteria for rehabilitation recognition.

Shin Se-don, an emeritus professor of economics at Sookmyung Women's University, emphasized, "Debt restructuring is a system designed to provide economic recovery opportunities for vulnerable debtors facing financial hardship. It is essential to design the review criteria more precisely to prevent moral hazard."

Representative Kim Sang-hoon stated, "The inclusion of homeowners and high-income earners in debt restructuring under the guise of living expenses is evidence that the system is being misused as a refuge for investment failures. We must refine the review criteria to prevent moral hazard."