110,000 debtors to escape collection pressure as New Leap Fund buys 1 trillion won in overdue loans

About 110,000 people will be freed from years of debt collection and penalty interest after financial authorities decided to use the New Leap Fund to purchase roughly 1 trillion won ($647 million) in long-overdue loans held by private bad-debt securitization firms. Regulators also plan to review systemic reforms to guard against an overheating distressed-debt market and excessive collection practices.

The Financial Services Commission said it held a progress review meeting Friday, chaired by Secretary General Shin Jin-chang, with the Financial Supervisory Service, Korea Asset Management Corp. (Kamco) and major investors in securitization firms to discuss the results of purchase negotiations under the New Leap Fund program.

The push follows President Lee Jae-myung's remarks at a Cabinet meeting last month, in which he flagged the problem of aggressive long-term debt collection by Sangnoksu, a private bad bank. Financial authorities subsequently reached an agreement with Sangnoksu's investors on a liquidation process, then conducted a full survey of long-overdue loans held by similar securitization firms and began negotiating purchases through the New Leap Fund.

The total volume of bonds eligible for New Leap Fund purchases was confirmed to exceed 1 trillion won. A comprehensive FSS survey of securitization firms held, invested in or managed by the financial sector found 167 such firms holding unsecured personal overdue loans as underlying assets, with total overdue debt amounting to 5.98 trillion won.

Of those, 46 firms were found to hold 1.06 trillion won in loans — owed by about 113,000 people — that qualify for New Leap Fund support: debts of 50 million won or less overdue for at least seven years. The top three firms — Sangnoksu (723.5 billion won), KB Star (281.7 billion won) and Genesis (25.8 billion won) — together held 1.03 trillion won, the vast majority of all eligible bonds.

Kamco completed purchase negotiations with 45 of the 46 firms, excluding Genesis, covering a total of 1.03 trillion won in bonds. Loans worth 1.01 trillion won held by four firms, including Sangnoksu and KB Star, are set to be purchased by the end of this month, while the remaining 25.8 billion won in bonds held by the other 41 firms will be acquired in stages by the end of July.

Once the New Leap Fund acquires the bonds, collection activity stops immediately. Debts owed by socially vulnerable groups — including recipients of basic livelihood benefits — will be written off without a separate repayment capacity assessment. For other borrowers, repayment capacity will be evaluated, and debts will be written off within one year if the borrower is found to have lost the ability to repay at a level comparable to personal bankruptcy. Those with significantly limited repayment capacity will receive debt restructuring support.

The FSC said it expects the purchases to give about 108,000 people the foundation to resume normal economic activity, free from long-term collection pressure and penalty interest. The commission said it will continue negotiations with Genesis, the one firm where talks have not yet concluded. Sangnoksu, established during the 2003 credit card crisis, is also set to sell its remaining bonds — roughly 130 billion won that fall outside the New Leap Fund's scope — to Kamco before proceeding with liquidation.

Alongside this, the FSC said it would tighten oversight of the distressed-debt securitization market. While securitization of overdue loans has been permitted only on a limited basis since the COVID-19 pandemic, regulators said that if liquidity in the funding market expands, rising prices for distressed debt and growing pressure to recover funds could fuel excessive collection practices.

"We plan to closely monitor trends in the overdue-loan securitization market and will review regulatory reform measures if concerns about market overheating or excessive debt collection arise," the FSC said.