Writing off financial debts does not erase unpaid national and local taxes, leaving a burden that can block vulnerable borrowers from getting back on their feet, a Korean research institute said. With the government weighing a plan to buy delinquent loans directly, the institute argued that Korea needs an integrated debt restructuring framework that also covers public obligations.
In a policy paper titled "The Limits of the Bulk Purchase Policy for Delinquent Loans and Policy Proposals for Substantive Rehabilitation Support," the Korea Inclusive Finance Institute said on the 19th that lawmakers should create a legal basis for including public debts such as national and local taxes in debt restructuring and for reducing or writing off both tax principal and surcharges.
Under current law, unpaid national and local taxes are classified as non-dischargeable debt, according to the institute. Even if a court grants a bankruptcy discharge or a borrower completes an individual rehabilitation process, the tax arrears remain in full. The National Tax Service and local governments offer special collection measures for arrears owed by small businesses, as well as statutes of limitations of five to 10 years, but the institute said the requirements are strict and the programs temporary, limiting their effectiveness.
The institute proposed amending related laws so that debt restructuring procedures — including individual rehabilitation, workouts and bankruptcy — can cover not only private financial debts but also national taxes such as income tax and value-added tax and local taxes such as acquisition tax, property tax and local income tax. It also suggested temporarily suspending credit information registration and asset seizure procedures tied to tax arrears once a debt restructuring process begins.
The institute also called for a cautious approach to the government's plan to buy delinquent loans in bulk. President Lee Jae-myung proposed at a Cabinet meeting on the 13th that the government directly purchase delinquent loans held in the market at about 5% of principal and clear them. The aim is to put preemptive measures in place to ease the burden on low-income borrowers as high interest rates persist.
The institute said such bulk purchases could increase the fiscal burden and undermine the price discovery function of financial markets. Unsecured delinquent consumer loans typically trade at roughly 10% to 15% of principal depending on a borrower's capacity to repay, it said. If the government buys below that range, financial firms would be unlikely to agree, while buying at market prices would add to the fiscal burden.
Factoring in potential bad loans that financial firms write off or sell each year, the institute said the volume of debt the government might need to purchase could swell to between 80 trillion won and more than 100 trillion won. It also warned that blanket purchases and write-offs could encourage moral hazard among borrowers who are able to repay and prompt financial firms to tighten lending standards.