South Korea to Eliminate Legal Loophole That Extended Debt Collection Periods
South Korea is moving to curb a long-standing debt collection practice that has allowed financial institutions to extend the statute of limitations on unpaid debts without a debtor’s knowledge.
The Ministry of Justice and the Financial Services Commission (FSC) announced plans to eliminate a special legal provision that permits creditors to use public notice service in payment order proceedings. Officials say the change is intended to prevent financial institutions from routinely extending collection periods through simplified court procedures while strengthening protections for financially vulnerable consumers.
The reform follows criticism that the current system has enabled creditors to prolong collection activity even when debtors were unaware that legal action had been initiated. The government said the legislative changes will support a broader policy of allowing debt claims to expire under normal limitation periods unless there is a clear justification for an extension.
Government seeks to end special payment order procedure
South Korea’s payment order procedure is designed as a simplified legal process that allows creditors to obtain an enforceable court order without a full trial, provided certain legal requirements are met. The process generally proceeds based on the creditor’s application, eliminating the need for court appearances in many cases.
Under the Civil Procedure Act, service by public notice is generally not permitted in payment order proceedings because of the simplified nature of the process. However, a 2014 amendment to the Special Act on the Promotion of Legal Proceedings created an exception for certain financial and public institutions.
That exception currently applies to 26 organizations, including banks, specialized credit finance companies, and securitization entities, allowing them to complete payment order procedures through public notice service when other service methods are unsuccessful.
Officials now say the exception has been used to repeatedly extend statutes of limitations rather than resolve outstanding debts.
Concerns over prolonged collection efforts
The government acknowledged ongoing criticism that some financial institutions have relied on the special procedure to mechanically renew debt collection rights, including for borrowers with little realistic ability to repay.
Consumer advocates have argued that debtors facing financial hardship often remain unaware that the statute of limitations has been extended through payment order proceedings, resulting in collection activity continuing for significantly longer than expected.
According to the announcement, President Lee Jae-myung directed authorities to review the system after raising concerns that rules originally introduced for the operational convenience of financial institutions had become unfair to debtors.
The Ministry of Justice said it will pursue legislation to fully abolish the public notice service exception, with the goal of preventing indiscriminate payment order filings intended primarily to preserve collection rights.
Financial regulators introduce additional reforms
Alongside the legislative proposal, the Financial Services Commission plans to implement several policy changes aimed at making expiration of debt claims the standard outcome rather than repeated extensions.
One of the first measures will amend the Rules on Recognition of Bad Debts for Financial Institution Claims. The revised rules are expected to take effect in September.
Under the new framework, financial institutions seeking bad debt recognition and related tax benefits for personal finance claims will generally be required to allow the statute of limitations to expire at the first maturity point rather than repeatedly extending collection periods.
Regulators said the policy is intended to discourage long-term recovery efforts on debts that have already been recognized as losses for tax purposes.
Reporting requirements and internal policy changes planned
The Financial Services Commission also plans to introduce reporting and disclosure requirements covering how financial institutions manage statutes of limitations for personal finance claims.
Performance data will be collected and publicly disclosed, beginning with results for the first half of this year. Officials believe greater transparency will encourage institutions to allow eligible debts to reach their legal limitation period instead of routinely seeking extensions.
In addition, financial institutions will be expected to update their internal policies by September to ensure that decisions regarding statute of limitations extensions are based on reasonable assessments of whether a debt remains recoverable.
According to the FSC, these measures are designed to reduce automatic extensions and encourage more deliberate management of delinquent accounts.
If implemented as planned, the reforms would represent a significant shift in South Korea’s approach to debt collection by limiting reliance on procedural mechanisms that have historically allowed creditors to preserve claims for extended periods without direct debtor participation.
