[Jeon Daegyu's 7 Trials and 8 Failures] The Need for Prompt Response to Mortgage Loans

Published 12 Mar.2021 11:10(KST)

As of the end of January, the outstanding balance of mortgage loans reached 726.9 trillion won. If financial institutions begin deleveraging in earnest and the impact of COVID-19 materializes, mortgage loans could pose a significant burden on the economy. Is there a way for the rehabilitation court to resolve the mortgage loan issue?

The first option to consider is the individual rehabilitation procedure. The individual rehabilitation procedure is a system designed to reduce excessive personal debt and enable individuals to quickly resume normal economic activities. However, only unsecured loans are included in the debt adjustment target, and secured loans are excluded. Even if the individual rehabilitation procedure begins, mortgage loan creditors can auction off the house. In this case, the individual debtor not only loses their residence but also faces housing cost burdens and instability in life, making it difficult to proceed with the individual rehabilitation process. The foundation of a dignified life could be shaken. This directly contradicts the purpose of the individual rehabilitation system, which is to provide individuals with an opportunity to return to normal social life.

With this awareness of the problem, the Seoul Rehabilitation Court, together with the Financial Services Commission and the Credit Counseling and Recovery Service, has prepared a mortgage loan-linked individual rehabilitation procedure (a debt restructuring program related to mortgage loan claims). The mortgage loan-linked individual rehabilitation procedure allows debtors to simultaneously utilize the Credit Counseling and Recovery Service’s mortgage loan debt adjustment and the court’s individual rehabilitation procedure for unsecured loan debt adjustment. When a debtor who bears a mortgage loan to a financial institution files an application for the commencement of individual rehabilitation proceedings with the court, a forum is provided early in the individual rehabilitation process through the Credit Counseling and Recovery Service for negotiations between creditors and debtors regarding mortgage loan claims. Accordingly, the terms agreed upon by the parties are reflected in the repayment plan, thereby providing an opportunity for debt adjustment related to mortgage loans within the individual rehabilitation procedure. However, the mortgage loan-linked individual rehabilitation procedure has limitations in that it is neither something the court can lead proactively nor a legally binding enforcement.

Next, the use of rehabilitation procedures (general rehabilitation) can be considered. In the individual rehabilitation procedure, secured claims are separate rights, and once the repayment plan is approved, there is no way to prevent the execution of secured claims, making it difficult for individual debtors with mortgage loan claims to retain their homes while proceeding with individual rehabilitation. However, in rehabilitation procedures, the rights of secured creditors are also restricted. Therefore, if an individual debtor needs to prevent the execution of a mortgage loan-related security interest, they can use the rehabilitation procedure. However, rehabilitation procedures have problems such as a long repayment period of 10 years, the need for creditors’ consent, and high costs.

Ultimately, legislative solutions are necessary. In Japan, the Civil Rehabilitation Act includes a "special provision on mortgage claims" that allows individual debtors who have taken out loans secured by housing to rehabilitate while retaining their homes. It allows for a suspension order on the execution procedure of the mortgage securing the mortgage claim and stipulates that the effect of the repayment plan with special provisions for housing funds extends to the mortgage, preventing its execution as long as repayments continue. In Korea, there have been several attempts in the National Assembly to introduce special measures regarding mortgage loans. However, these have not been completed into final legislation. It is time to expedite legislative supplementation for mortgage loans from the perspective of housing stability and mitigating the anticipated economic burden.