The government has reintroduced debt adjustment measures for small business owners and self-employed individuals who have struggled to repay loans taken during the COVID-19 pandemic. This initiative targets long-term overdue debts that originated before June 2023 and remain unpaid. From 2020 to 2023, personal business loans amounted to 358.7 trillion won, with an outstanding balance of 154.7 trillion won, or 43.1%. The proportion of loans overdue by more than three months stands at 6.3 trillion won, representing 4.1% of the unpaid balance.
The COVID-19 pandemic dealt an unprecedented blow to self-employed individuals. Government-imposed business restrictions and social distancing measures led to a significant drop in sales, forcing many small business owners to rely on loans to cover rent and labor costs. Expecting individuals to bear sole responsibility for debts that became unmanageable due to these circumstances is not a realistic solution. Ignoring long-term defaulters who have lost their ability to repay not only increases collection costs for financial institutions but also raises welfare and social costs. This is why a structured debt adjustment system is necessary to facilitate a return to normal economic activity.
Since October of last year, the government has been implementing a program through the New Leap Fund to purchase long-term overdue debts of up to 50 million won that have persisted for over seven years, with the option to write off debts for those unable to repay.
While the intention to provide a second chance to struggling self-employed individuals is understandable, the challenge lies in determining the criteria for assistance. If the distinction between those who can repay their debts and those who genuinely cannot is not clearly made, debt adjustment could quickly devolve into a controversial debt forgiveness program. If the principle of debt relief is applied indiscriminately, it could undermine the very credit order of our society, fostering a misguided expectation that “if you default and hold out, the government will eventually resolve it.”
The most significant issue is equity among diligent repayers. Many self-employed individuals have tightened their belts to repay both principal and interest despite declining sales, while others have liquidated their businesses and used their deposits to settle debts. If policies repeatedly reduce the principal owed by defaulters, how can we justify this to those who have been responsible in their repayments? The moment diligent debtors feel they are at a disadvantage, the foundational principles of credit and trust in finance are compromised.
The government is aware of these issues. The existing New Leap Fund is designed to assess repayment capacity before deciding on debt write-offs, and the New Start Fund also evaluates income and assets to support borrowers lacking repayment ability. Recently, the government has included virtual assets and unlisted stocks in asset assessments and is strengthening investigations into fraudulent activities, such as intentionally reducing assets or filing false reports. This indicates that the government is seriously considering the potential for moral hazard.
Therefore, before expanding support, it is crucial to establish stringent assessment mechanisms. Stricter criteria should be applied for those who repeatedly seek debt adjustments. The focus should not only be on debt forgiveness but also on providing support for business closures, career transitions, and re-establishment to prevent falling back into the cycle of debt.
Compensation for diligent repayers must also be implemented. The government has announced plans to expand incentives, such as lowering interest rates and guarantee fees for small business owners and SMEs who have consistently repaid their debts. These measures need to be more aggressively expanded. If there are no benefits for those who have repaid their debts and support is concentrated solely on defaulters, the sustainability of the policy will be jeopardized. Eliminating the perception that responsible individuals are at a disadvantage is essential for gaining social consensus on debt adjustment policies.
Finance ultimately operates on promises and trust. Helping society recover from unavoidable failures is entirely different from the state erasing debts that should be repaid. Support should be precisely targeted at those in urgent need, assessments must be strict, and diligent repayers should be clearly favored. The moment government debt adjustments are perceived as a system that erases debts for those who simply endure, the credibility of the policy and the financial order will collapse.
* This article has been translated by AI.
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