Debts you thought had expired were quietly extended — Ministry of Justice moves to end the practice

The government is moving to abolish a special public-notice service provision so that financial institutions can no longer extend the statute of limitations on debts through payment orders without the debtor's knowledge.

The Ministry of Justice said Wednesday it would work with the Financial Services Commission to fully abolish the special public-notice service provision, curbing the practice of financial institutions indiscriminately filing for payment orders to extend statutes of limitations and strengthening protections for debtors.

A payment order — also known as a dunning order — is a summary debt-resolution procedure initiated by a creditor's application, allowing the creditor to obtain an enforcement title without appearing in court. Public-notice service is generally not permitted in payment-order proceedings, but a 2014 amendment to the Act on Special Cases Concerning the Promotion of Legal Proceedings created an exception allowing certain financial institutions to use public-notice service in payment-order cases as well.

Critics have argued that financial institutions have used this special provision to mechanically extend statutes of limitations even for vulnerable debtors with little ability to repay, leaving those in financial distress unaware that their limitation periods had been extended and subjecting them to prolonged collection pressure.

President Lee said the simplified public-notice service requirements — streamlined for the convenience of financial institutions — were unduly harsh on debtors, and directed the government to reform rules that one-sidedly favor lenders. The Ministry of Justice said it would fully abolish the special provision to improve the practice and protect debtors.

The FSC said it was pursuing several policies to establish the principle that statutes of limitations should expire as a rule, with extensions permitted only as an exception. To address the practice of financial institutions continuing to extend limitation periods on written-off debts already recognized as tax losses while pursuing collection over extended periods, the FSC said it would amend the Financial Institution Bad Debt Write-off Business Rules in September.

In addition, the FSC said it would set up a reporting and disclosure system tracking each financial institution's record of completed statutes of limitations on personal financial debts, with disclosures beginning with this year's first-half results, to give lenders greater incentive to let limitation periods run their course. The commission said it would also require financial institutions to incorporate into their internal regulations a standard of "reasonable" assessment of the recoverability of personal financial debts before deciding whether to extend limitation periods, preventing repetitive and mechanical extensions.

The Ministry of Justice said it would work with the FSC to ensure that collection practices taking repayment capacity into account take hold in practice, further strengthening protections for debtors in financial distress.

Justice Minister Jeong Seong-ho said the ministry would "do its utmost to ensure that relevant legislation is amended in the National Assembly to reform the reckless practice of extending limitation periods, which completely blocks debtors trapped in long-term arrears from any chance of recovery."

FSC Chairman Lee Eok-won said he expected the reform to end "the wrongful practice of mechanically filing payment orders to extend statutes of limitations — even for debtors with little ability to repay — and pursuing collection over extended periods."