[Q&A] Saechulbal Fund, Adjustment Limit is 1.5 Billion KRW... Interest Rate Reduction Differentiated by Delinquency Period

Applications accepted for up to 3 years from October... Only one application allowed
Eligibility not disclosed to prevent moral hazard... Check on the debt adjustment program platform

[Asia Economy Reporter Song Hwajeong] The government’s new start fund, worth 30 trillion won and prepared for self-employed and small business owners affected by COVID-19, will be fully implemented starting this October.

On the 28th, the Financial Services Commission summarized the operation plan for the new start fund in a Q&A format.

Why was the new start fund established separately from the Credit Recovery Committee’s debt adjustment system?

The Credit Recovery Committee’s debt adjustment, established during the 2002 credit card crisis to assist the rapidly increasing number of credit delinquents, mainly targets individual credit debts, limiting support for self-employed and small business owners. Small business owners include not only individual entrepreneurs but also some corporate small enterprises, but the Credit Recovery Committee’s debt adjustment does not cover corporate debt adjustments. The Credit Recovery Committee’s debt adjustment focuses primarily on credit debt adjustments (99.9%), which limits proactive support for self-employed and small business owners who have a high proportion (87%) of secured and guaranteed debts. The Credit Recovery Committee’s debt adjustment determines adjustment details through individual negotiations with creditor financial institutions, making it difficult to handle large-scale defaults intensively. In contrast, the new start fund pre-determines debt adjustment details (standard type) through agreements, enabling faster and more efficient handling of large-scale debt adjustment cases.

Is the debt limit for debt adjustment (1.5 billion won) too high?

The current debt adjustment programs restrict eligibility to debtors with total debts between 1.5 billion and 2.5 billion won. The Credit Recovery Committee’s debt adjustment has a maximum limit of 1.5 billion won (1 billion won secured, 500 million won unsecured), court individual rehabilitation allows up to 2.5 billion won (1.5 billion won secured, 1 billion won unsecured), while court general rehabilitation and bankruptcy have no debt limits. Notably, court individual rehabilitation expanded the debt limit from 1.5 billion to 2.5 billion won in April last year, considering economic scale expansion. The new start fund sets the debt limit at 1.5 billion won, consistent with the current Credit Recovery Committee system, considering fairness and support effectiveness, and expects that most self-employed and small business owners will be included even with this limit.

When can applications for debt adjustment under the new start fund be submitted?

The debt adjustment application and related programs are scheduled to begin in October. The implementation date and detailed usage guidelines will be separately announced once preparations such as agreements with financial institutions, Korea Asset Management Corporation (KAMCO), and the Credit Recovery Committee, system upgrades, and fund establishment are completed. The online platform is planned to open in October, the telephone call center in September, and offline service desks will operate at the Integrated Support Centers for Low-Income Finance (50 locations) and KAMCO offices (26 locations).

What are the eligibility requirements for applicants? Which applicants and loans are excluded?

Individuals or corporate small business owners who are non-performing or at risk of default due to COVID-19 damage can apply for debt adjustment. Any individual entrepreneur or corporate small business owner affected by COVID-19 who is unable or struggling to repay loans can apply. However, businesses in real estate rental, gambling machine manufacturing, professional services such as legal, accounting, and tax, financial industries, and those not eligible for the Ministry of SMEs and Startups’ loss compensation are excluded.

Additionally, loans with low relevance to COVID-19 business losses or difficult to adjust (loans related to real estate rental/sales, personal asset formation loans such as home purchases, jeonse deposit loans) are not adjustable. Discounted bills, trade bills, SPC loans, deposit-secured loans, loans with disposal restrictions, and loans under rehabilitation procedures are also excluded. However, business funds borrowed using housing as collateral and commercial vehicle loans such as for trucks and heavy equipment are eligible as they are loans for business operation.

To prevent intentional loan and delinquency abuse for debt adjustment applications, new loans taken within six months prior to the application are ineligible for debt adjustment, and non-performing debtors with new loans exceeding 30% of total debt within six months will not be adjusted.

How can eligibility be verified?

Eligibility can be checked online through the 'Debt Adjustment Program Platform,' which pre-collects relevant information. However, applicants who want to prove COVID-19 damage themselves due to difficulties verifying certain information (such as receipt of loss compensation, use of maturity extension or repayment deferral, rejection of maturity extension requests by financial companies) must submit related documents directly.

Are only debtors who received maturity extension or repayment deferral eligible for debt adjustment?

The new start fund’s debt adjustment targets all individual entrepreneurs and small business owners who have difficulty repaying loans due to COVID-19, not only those who received maturity extension or repayment deferral. However, individual entrepreneurs and corporate small business owners currently under maturity extension or repayment deferral are recognized as COVID-19 affected debtors without needing to prove receipt of loss compensation or other COVID-19 damage evidence.

Are freelancers and workers in special employment types eligible? What about those who have closed their businesses?

Freelancers such as private tutors or workers in special employment types can receive support if they meet the criteria for small business owners as individual entrepreneurs or corporate businesses. Those who closed their businesses after April 2020 due to COVID-19 and are repaying related debts can also apply.

If a debtor has multiple loans, can they selectively apply for debt adjustment on certain debts?

Debtors can choose which eligible debts they want to apply for debt adjustment. For example, they may exclude relatively easy-to-repay ultra-low-interest or small loans and apply only for the debts they want adjusted. However, non-performing debtors with delinquency records over three months who want to adjust credit debts must apply for all their credit debts. Since principal adjustments are made for non-performing debtors’ credit debts, selective debt adjustment is not allowed to ensure fairness among creditors.

Can debtors apply for debt adjustment if defaults occurred before the program’s implementation?

Debt adjustment is possible even if defaults occurred before the new start fund’s operation, provided COVID-19 damage is proven. Defaults occurring before April 2020, the start of COVID-19, can still be adjusted considering the debtor’s inability to recover due to COVID-19 damage.

How are loan maturities and interest rates adjusted?

Loan maturities can be extended up to a maximum grace period of 1 to 3 years and long-term installment repayment of 10 to 20 years, resulting in a total extension of up to 11 to 23 years. Debtors can select a sufficient repayment period within the maximum term that suits their situation.

Interest rates are adjusted differentially based on the debtor’s delinquency period. For debtors delinquent less than 30 days, the contracted interest rate is maintained, but any portion exceeding 9% high interest is capped at 9%. For debtors delinquent between 30 and 90 days, a single interest rate is applied within the repayment period. The shorter the repayment period chosen by the debtor, the lower the loan interest rate, providing an incentive for early repayment. For debtors delinquent over 90 days, interest is waived.

Is a 10 to 20-year repayment period excessively long? Does this excessively increase government burden?

Considering that the target debtors of the new start fund are structurally weakened non-performing or at-risk debtors, it is necessary to provide sufficient time for normal business recovery. Safety measures are also in place to prevent debtors from choosing excessively long loan maturities beyond their repayment capacity by lowering interest rates for shorter repayment periods. Longer repayment periods increase the debtor’s repayment likelihood (reducing default rates), which is expected to improve the fund’s capital recovery rate.

Is interest deferral during the grace period possible? If so, what is the interest rate?

Debtors at risk of default or non-performing debtors who want to adjust secured debts are allowed up to one year of interest deferral during the grace period. Interest on non-performing debtors’ credit debts is waived, so interest deferral is unnecessary. However, in such cases, the existing contracted interest rate, not the adjusted rate from debt adjustment, applies to prevent indiscriminate interest deferral applications.

Can financial companies reject debt adjustment proposals when debtors apply?

Unlike Credit Recovery Committee workouts where debt adjustment can be rejected depending on financial company consent, if debtors apply according to the system’s terms, financial companies cannot reject the debt adjustment proposal. However, financial companies opposing the proposal can sell their claims to the fund and terminate the transaction relationship.

Can creditor financial companies apply for the debt adjustment program instead of debtors?

Financial companies can apply to sell claims on long-term delinquent debtors (delinquent over three months) to the new start fund. This provides a chance for rehabilitation through debt adjustment without proceeding to collection procedures. However, for debtors at risk of default, financial companies cannot apply for debt adjustment on their behalf.

Why is the maximum installment repayment period for credit and guaranteed debts 10 years, but for real estate secured debts up to 20 years?

Real estate secured debts typically involve larger debt amounts, so even with a 10-year installment repayment, monthly repayment burdens can be excessive. For example, a debtor borrowing 300 million won through a real estate secured loan would have a monthly principal repayment of about 2.5 million won over 10 years. Therefore, longer installment repayment is allowed to adjust monthly repayment burdens to a reasonable level. However, when choosing installment repayment longer than 10 years, it is necessary to consider that the adjusted interest rate changes every five years.

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