[Op-Ed] Debt Adjustment

The Asian currency crisis shook Korea’s large corporations 11 years ago. Today, the latest economic crisis has hit small and medium-size enterprises, small business owners and households. The household delinquency rate jumped from 0.6 percent late last year to 0.89 percent in late February this year. Facing mounting difficulty repaying debt, more people have resorted to personal debt workout programs. The number of people who sought consulting with the Credit Counseling and Recovery Service reached 147,000 in the first three months of this year, surging 94 percent from a year ago. Applications to the workout program also jumped 55 percent to number 24,000.

The government since late last year has begun a series of credit recovery programs to restore the middle class and support low-income earners. It has even suggested measures to halve interest or principal. A court bankruptcy program even writes off the debts of “sincere but unfortunate debtors” up to 100 percent. Certain people, however, have abused these programs. A family of three including a civil servant borrowed a combined 300 million won (226,415 U.S. dollars). They asked the court to write off their debt after falsifying documents showing they had no assets and that they had borrowed money from unregistered private money lenders. On the Internet, certain netizens are even selling strategies to avoid debt collection or get interest payments written off. For example, they teach credit card delinquents to negotiate with credit card companies after failure to pay debt for more than two years, and ask other people to talk with the companies on their behalf.

Amid mounting worries over this moral hazard, the pre-workout program will take effect for a year from Monday. The program will help delinquents ineligible for support from existing workouts since their debt is outstanding for less than three months. If a person passes the examination procedure, his or her overdue interest is waived and loan interest is cut 30 percent. The Financial Services Commission said, “It is undesirable for financial authorities to provide measures to cut interest. But both indebted households and financial institutions can minimize their losses by reducing the number of those with a bad credit history.”

According to the section on King Sejong in the Annals of the Joseon Dynasty (released in 1439), the government agency in charge of audit and inspection told the king not to write off debts “to prevent foolish people from relying on luck.” Nevertheless, several kings wrote off debts of those who suffered from difficulties such as drought. In any era, the government should not provide excessive support. If people are encouraged to believe that they have no need to repay debt, even well-intentioned programs could shake this credit-driven society to its foundation.

Editorial Writer Hong Kwon-hee (konihong@donga.com)