[Jeon Daegyu's 7 Trials and 8 Failures] How to Manage Debt?

Jeon Daegyu, Chief Judge of Seoul Bankruptcy Court

Whether an individual or a company, having excessive debt (liabilities) makes it difficult to engage in normal economic or business activities. Therefore, at some point, the debt must be settled. How should the debt be settled? There are private and legal methods for debt (liability) settlement (adjustment).

The private method involves the debtor and creditors agreeing to adjust the debt. A representative example is a voluntary agreement. In a voluntary agreement, the creditors participating in the agreement consent to the debt adjustment. For instance, if debtor Gap (甲) has creditors A, B, C, and D (mainly banks or financial institutions), the debtor and the four creditors agree to reduce the debt by 50%. Since it is a voluntary agreement, it is not binding. Therefore, if even one creditor does not agree, the debt adjustment cannot be made. This is natural according to the principle of private autonomy emphasized in civil law. A voluntary agreement is a debt waiver under civil law. However, a voluntary agreement has the drawback that all creditors must agree. This makes debt adjustment difficult when there are many creditors or the amount is large.

Therefore, a legal method allowing debt adjustment by majority vote has emerged. A representative example is debt adjustment under the "Debtor Rehabilitation and Bankruptcy Act" (Debtor Rehabilitation Act). This includes rehabilitation procedures, bankruptcy procedures, and individual rehabilitation procedures. In rehabilitation procedures, if a certain percentage of the creditors holding claims agree, debt adjustment is possible even if some creditors oppose. For example, in the previous case, even if creditor C opposes the debt adjustment, if all other creditors agree, the debt adjustment can proceed. Individual rehabilitation procedures do not require creditors' consent. The court adjusts (reduces or waives) the debt ex officio. Bankruptcy procedures involve selling all the debtor's assets and distributing the proceeds to creditors. In the case of a corporation, the assets are distributed to creditors and the corporation is dissolved. In contrast, for individuals, after distributing to creditors, the remaining debt is fully waived. While rehabilitation and individual rehabilitation procedures involve repaying a portion of the debt over a certain period before waiving the rest, bankruptcy procedures result in immediate full debt waiver by court discharge.

Debt adjustment by voluntary agreement is called a private settlement procedure, and debt adjustment under the Debtor Rehabilitation Act is called a legal settlement procedure. It is important to note the meaning of "legal (法的)" in legal settlement procedures. There is also debt adjustment under the "Act on the Promotion of Corporate Restructuring" (Corporate Restructuring Promotion Act), known as the joint management procedure. Debt adjustment under the Corporate Restructuring Promotion Act is conducted by the main creditor bank through majority vote. However, the scope of debt subject to adjustment differs from that under the Debtor Rehabilitation Act. Debt adjustment under the Debtor Rehabilitation Act covers all debts, but under the Corporate Restructuring Promotion Act, only financial debts are subject, excluding commercial debts. For example, loans from banks are subject to debt adjustment under both laws, but trade payables are only subject to adjustment under the Debtor Rehabilitation Act, not under the Corporate Restructuring Promotion Act. Also, in terms of procedural leadership, debt adjustment under the Debtor Rehabilitation Act is led by the court, whereas under the Corporate Restructuring Promotion Act, it is led by the creditor group (main creditor bank). Therefore, the "legal" in legal settlement procedures should be understood as involving court participation, not merely being based on law. Debt adjustment under the Corporate Restructuring Promotion Act is statutory but not court-led, placing it between private and legal settlements.

Which debt adjustment method an individual or company chooses depends on the scale of debt, circumstances, and type of debt. If voluntary debt adjustment is possible, the private settlement procedure (voluntary agreement) should be chosen. This may apply to individuals or small and medium-sized enterprises with few creditors or relatively small debt. If there are many creditors or creditors who absolutely oppose debt adjustment, the legal settlement procedure (debt adjustment under the Debtor Rehabilitation Act) can be considered. If there is a main creditor bank and no commercial debt, choosing debt adjustment under the Corporate Restructuring Promotion Act is advisable. Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court

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