Personal rehabilitation filings with courts this year hit an all-time high, driven by prolonged economic downturn, business failures, and falling incomes.
According to the courts on the 27th, personal rehabilitation cases filed with courts nationwide from January to November this year totaled 136,681. That is 5.5% higher than the full-year tally last year (129,499) and the highest since 2015, when comparable statistics became available. Annual personal rehabilitation applications hovered around 80,000 from 2020 to 2022, but rose to 120,000 starting in 2023 and have been increasing.
The number of cases in which courts approved personal rehabilitation reached 105,399 from January to November this year, the most since 2015. The average debt per personal rehabilitation applicant from January to June this year was 158.88 million won, up about 9% from last year's full-year average (145.74 million won).
When a borrower cannot repay, the first options considered are debt adjustment programs such as expedited debt adjustment and personal workout. However, debt adjustment only applies to loans from financial institutions that have joined the Credit Recovery Support Agreement. Personal rehabilitation also covers private loans borrowed outside financial institutions. The rise in personal rehabilitation means more people are carrying debts that cannot be resolved through debt adjustment.
According to the Korea INclusive Finance Agency (KINFA) and others, during the COVID-19 crisis in 2020, sales plunged and many self-employed people held on with loans but ultimately failed to repay. Vulnerable people with limited income are becoming credit delinquents due to job loss or income declines. Once someone becomes a credit delinquent, it is hard to find new employment, creating a vicious cycle of unpaid debts.
In the Korea INclusive Finance Agency (KINFA)'s counseling cases on debt adjustment and personal rehabilitation, a woman in her 50s identified as A, who lives in Seongnam, Gyeonggi, closed five mobile phone shops she ran due to the fallout from COVID-19; her debts swelled to 80 million won and she became a credit delinquent. Even after getting a new job, her bank account was seized and financial transactions were impossible, so she could not receive her wages. A woman in her 40s identified as B, who lives in Wonju, Gangwon, also became a credit delinquent after quitting her job as a cook due to a back injury, with her loans rising to 71 million won.
According to the Bank of Korea, as of the end of September this year, the outstanding loan balance of the self-employed was 1,072.2 trillion won. The arrears rate was 1.76%, lower than at the end of March this year (1.88%) but higher than the long-term average (1.41%).
In particular, the arrears rate among vulnerable self-employed people, who account for about 10% of the self-employed, was 11.09%, more than 22 times the arrears rate (0.5%) among those able to repay. Vulnerable self-employed refers to those with at least three household loans and individual business loans and who are either in the bottom 30% by income or have a low credit score of 664 or below.