Debt relief becomes a life support trap

President Lee Jae-myung introduced the “Jubilee Bank” during his tenure as mayor of Seongnam to assist low-income citizens struggling with debt. The initiative took its name from the biblical Jubilee, a time of debt forgiveness every 50 years. On July 4, speaking to residents in the Chungcheong region, Lee said, “It is a tragedy in a civilized society to die in debt.” Yet in South Korea, a so-called “debt jubilee” occurs roughly every five years. Successive administrations, from President Roh Tae-woo to the current government, have implemented comprehensive debt relief programs, including farm debt cancellations, credit amnesties, and long-term delinquency write-offs.

True to his background as a former head of Jubilee Bank, President Lee has launched the most extensive program ever. His administration plans to write off debts of up to 50 million won that have been delinquent for over seven years, benefiting 1.13 million vulnerable individuals, including small business owners. Additionally, 100,000 self-employed people impacted by COVID-19 will have up to 90 percent of their overdue principal forgiven. In total, the government aims to eliminate 22.6 trillion won in debt for 1.23 million individuals and small business owners. It is the government’s responsibility to help those on the brink of collapse regain their footing. Especially for small businesses hit hard during the pandemic, some level of debt restructuring is unavoidable.

The problem lies in the fact that these recurring debt forgiveness policies have not led to long-term improvements in the lives of vulnerable borrowers. Instead, they have deepened the structural risk of “repaying debt with more debt.” Data on credit loans to the bottom 20 percent income group show a temporary drop following debt relief, only to surge again. Approximately 20 percent of past recipients became credit delinquents again, according to statistics. Even after the previous administration launched a debt relief fund for small business owners with overdue debts, the number of low-income, low-credit self-employed individuals with loans from three or more financial institutions increased by 50 percent over three years.

Most critically, one-time debt forgiveness cannot fix the chronic oversupply problem that has turned the self-employment sector into a trap. Although the proportion of self-employed workers in total employment has dipped below 20 percent following the pandemic, it remains two to three times higher than in advanced economies. A lack of decent jobs has pushed young people and early retirees alike into self-employment for survival. Many start businesses without proper preparation, survive on loans, and eventually shut down. One in three self-employed individuals earns less than the monthly minimum wage of 2.1 million won. As the second baby boom generation (born between 1964 and 1974) begins retiring en masse, the situation is expected to worsen.

Continuing to offer debt relief to struggling self-employed workers without addressing these structural issues could lead to a rise in so-called “zombie entrepreneurs,” sustained by taxpayers’ money. It may also divert financial resources from viable businesses, undermining the sustainability of the broader self-employment ecosystem. Even more concerning, President Lee hinted at “additional relief” during the July 4 event, raising fears of moral hazard. There are already 3.61 million people who have repaid debts that fall under the current relief criteria (seven years in arrears, with a debt amount of less than 50 million won). Their sense of unfairness is palpable.

The government must impose strict eligibility criteria, such as excluding repeat beneficiaries, to minimize adverse effects. At the same time, it must accelerate structural reforms to eliminate marginal businesses that survive solely on debt. The ultimate solution for struggling self-employed workers is not short-term debt forgiveness but a structured exit strategy paired with job training and employment support. The self-employment sector cannot be kept alive indefinitely on the oxygen of debt relief.