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The government plans to wipe out personal debts. It may have a fairness issue.

Published: 24 Jun. 2025, 15:17 Updated: 24 Jun. 2025, 22:20

A street in Myeong-dong, central Seoul, on June 8 [YONHAP]

The Korean government’s plan to wipe out long-overdue personal debts of up to 50 million won ($36,672) has sparked growing controversy over fairness in the policy's application. Because the cap is applied per loan rather than per borrower, individuals with multiple qualifying debts could see amounts exceeding 50 million won fully forgiven.

The Financial Services Commission said on Monday that a debt-adjustment agency funded by Korea Asset Management Corporation will begin purchasing individual unsecured personal loans that have been delinquent for more than seven years, starting as early as the third quarter. Loans backed by collateral are excluded.

What’s drawing attention is the standard used to determine eligibility: The 50 million won threshold applies to each individual loan, not to the total debt held by one borrower. This means even if someone holds multiple loans — each under the limit and overdue by more than seven years — all of them could be eligible for cancellation.

For example, if a borrower has a 50 million won bank loan delinquent for 10 years and a separate 20 million won savings bank loan overdue for eight years, both would qualify under the policy. If the borrower is determined to lack repayment capacity, the combined 70 million won in debt could be written off.

“Since personal debts are scattered across more than 4,000 financial institutions, applying a borrower-based standard would require integrating all that data — which is not feasible in terms of cost or time," a financial official said.

No industry restrictions

The absence of any restrictions based on the borrower’s business or occupation has also stirred debate.

While the Yoon Suk Yeol administration’s New Start Fund excluded borrowers from certain sectors like property rental, legal and accounting services as well as gambling-related manufacturing, the newly announced plan under the Lee Jae Myung administration sets no such limits.

Mangwon Market in Mapo District, western Seoul, is bustling with shoppers on the afternoon of June 19. [NEWS1]

“The aim is to help individuals recover, so we chose not to examine what kind of work they did or what business they operated,” a financial authority official explained.

This means individuals who fell into debt from gambling-related businesses could also qualify, as long as the loans meet the criteria.

Despite fairness concerns, financial authorities say that not distinguishing between borrowers or industries is more effective in policy terms. Loans overdue by more than seven years are already considered virtually unrecoverable, and clearing them could help individuals regain financial footing.

Relief aimed at the most vulnerable

The Bank of Korea reported last year that 6.6 percent of borrowers as of the third quarter of last year were classified as vulnerable, meaning they had multiple debts and were either in the lowest 30 percent income bracket or had credit scores below 664.

This was up slightly from 6.4 percent in the first quarter of last year.

Officials insist the program includes safeguards against moral hazard. Eligibility for debt cancellation will depend on an individual review of repayment capacity.

Under the Moon Jae-in administration, a similar plan sought to write off debts under 10 million won that had been delinquent for over 10 years.

While 1.59 million people were initially eligible, only 118,000 ultimately qualified, based on their assessed ability to repay.

“Only those with 50 million won in debt that has been overdue for more than seven years and are effectively bankrupt will be eligible for cancellation,” a financial official said. “That means we have some safeguards in place to address concerns about fairness and moral hazard.

“We will first purchase as many qualifying loans as possible during the third quarter. If we can technically identify problematic cases, we will consider introducing additional criteria.”

Moral hazard and industry burden

Yet the issue remains contentious, as critics argue that repeated debt-relief initiatives may send the wrong message — that borrowers can simply avoid repayment by waiting it out.

ATMs in Seoul on June 22 [YONHAP]

The government’s plan to source the 4 billion won needed for the program from financial firms is also drawing backlash, as it could end up harming the interests of bank shareholders amid a push to protect shareholder interests through commercial law revisions.

“If the government is already asking private lenders to contribute from the outset of its term, there’s concern that they will be expected to fund every welfare-related issue going forward,” one industry official said.

Suk Byoung-hoon, an economics professor at Ewha Womans University, warned that the program could encourage borrowers to deliberately fragment loans into smaller amounts to qualify for relief.

"This sends the wrong signal — that breaking up loans into smaller amounts and holding out long enough is a strategy. Even if the loans are long overdue, this raises the risk of moral hazard. The government needs to ensure fairness in how much is forgiven per person, and it should consider limiting eligibility based on problematic industries."

Translated from JoongAng Sunday using generative AI and edited by Korea JoongAng Daily staff.
BY KIM NAM-JUN [[email protected]]