Heavy debtors borrow more to apply for rehabilitation program

A 29-year-old single working woman, surnamed Kim, who found herself in excessive debt, sought a way of breaking through the debt problem she faced such as pressure from debt collectors of banks and heavy burden of up to 40 percent in interest on loans from secondary banking institutions.

Kim turned her eyes to a debt broker who told her, “You can have your debt written off and be free from lenders who have threatened you to repay your debt.”

The broker said that a larger amount of debt would give her more chances to be qualified for rehabilitation from debt. Following the advice, Kim borrowed an extra 800 million won, bringing her total debt to 4 billion won. And then, she applied for rehabilitation.

The debt rehabilitation program was introduced by the court in 2004. It helps debtors with both a given amount of regular income and huge amount of loans, by making lenders write off part of the principal and interest.

This year, a large number of people have been applying for rehabilitation from debt, according to the financial industry. There have been 21,687 requests for debt rehabilitation during the first three months of this year, up 66.9 percent from 12,994 cases. The number of applications peaked at 64,171 last year amid a steady increase since 2008.

However, lenders worry there are more cases of moral hazard, in which debtors request rehabilitation just to avoid repaying their dues.

“The lenders’ biggest concern is moral hazard,” said Yang Seok-seung, head of the Customer Loan Finance Association. “A growing number of heavy debtors have been applying for debt rehabilitation after intentionally increasing their debt, a great threat to the health of lenders.”

He added a bigger problem is that there are no efficient measures to tackle the problem.

The government is determined to introduce “prior consultation system” in the legislation at the new National Assembly, making individual huge debtors obligatory to receive consultation before applying for rehabilitation and private bankruptcy but it’s a long way to the legislation, an expert said. <Korea Times>

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