[Jeon Daegyu's 7 Trials and 8 Failures] Why the Exemption Post-Management System Needs Improvement

Jeon Dae-gyu, Chief Judge of Seoul Bankruptcy Court

The rehabilitation procedures, bankruptcy procedures, and individual rehabilitation procedures operated by the court aim to help individuals or businesses facing financial difficulties adjust their debts to make a fresh start or recover. Adjusting debts means discharging (exempting) all or part of the debt, which inevitably involves sacrifices from creditors. The premise of discharge is that the debtor is sincere. The problem lies in the difficulty of judging whether the debtor is sincere. If insincerity is found during the hearing stage to decide on discharge, the discharge should not be granted. If insincerity is revealed after the discharge has been granted, the situation must be restored to the state before the discharge. How does the current "Debtor Rehabilitation and Bankruptcy Act" stand on this?

Let’s look at the rehabilitation procedure. This happened a long time ago. A company filed an application to commence rehabilitation proceedings and, without any particular issues, submitted a rehabilitation plan, obtained consent from creditors, and even received approval from the court. The rehabilitation plan roughly involved repaying about 40% of the debt amount and exempting the rest. Once approved, the representative requested early termination of the rehabilitation procedure, promising to repay the remaining debt in full. In the case of early repayment, repayment is made by converting to present value, so the actual repayment is much less than 40%. Naturally, there was a strong suspicion that the debtor had embezzled money before filing the rehabilitation application and then received exemption on part of the debt. Predictably, creditors strongly opposed this, demanding repayment as originally planned. The court was also in a difficult position. The problem is that if the debtor deceives the court and creditors through fraudulent means and obtains debt exemption through rehabilitation procedures, there is no way to restore the situation to its original state. In Japan, there is a system to cancel the rehabilitation plan if the rehabilitation procedure is abused to obtain debt exemption. However, Korea does not have such a provision. Ultimately, there is currently no proper way to deal with such situations.

What about individual bankruptcy? A while ago, an acquaintance visited my office. The complaint was as follows: they had lent a considerable amount of money to someone who had filed for individual bankruptcy a few years ago and even received a discharge decision. However, it turned out that this person had hidden assets and received the discharge, and now lives well, driving a luxury imported car. They asked what should be done. Once a discharge decision is received from the court, enforcement of debt repayment is not possible. In such situations, the discharge cancellation system can be considered. Discharge cancellation means canceling the discharge if a final guilty verdict is confirmed for the debtor regarding bankruptcy fraud or if the debtor obtained the discharge through fraudulent means. If the discharge is canceled, all creditors’ rights that were discharged are restored to their pre-discharge state, and the debtor’s liability is revived.

Thus, the discharge cancellation system can be an effective countermeasure against those who abuse the discharge system after discharge. However, discharge cancellation is not as easy as it sounds. To cancel a discharge, a final guilty verdict for bankruptcy fraud must first be confirmed. But in reality, it is not easy to be indicted for bankruptcy fraud, nor to receive a confirmed guilty verdict. Next, the discharge must have been obtained through fraudulent means. Fraudulent means refer to obtaining discharge by deception, threats, or other improper methods. The problem is that applications for discharge cancellation due to fraudulent means must be filed within one year after the discharge. One year passes quickly after the discharge decision. Therefore, discharge cancellation due to fraudulent means is also not an effective measure. Ultimately, there is no clear countermeasure against abuse of discharge in individual bankruptcy cases at present.

What about individual rehabilitation procedures? In the case of individual rehabilitation, if it is revealed after the discharge decision that the debtor obtained the discharge through deception or other fraudulent means, the court can cancel the discharge ex officio. However, it is not easy for the court to discover grounds for discharge cancellation and cancel the discharge ex officio after the case is closed, and interested parties must apply for discharge cancellation within one year from the date the discharge decision is finalized, which is the same problem as in individual bankruptcy. The purpose of the Debtor Rehabilitation Act, which is to promptly assist individuals or businesses suffering from excessive debt to make a fresh start or recover, must be fully realized. However, the absence or incompleteness of regulations on post-management after debt adjustment (discharge) can lead to moral hazard. To expedite discharge, a complete post-discharge management procedure must be in place. We look forward to future legislative improvements.

This content was produced with the assistance of AI translation services.