Insolvency Law in South Korea

Introduction

South Korean insolvency law is consolidated in the Debtor Rehabilitation and Bankruptcy Act (DRBA, 채무자 회생 및 파산에 관한 법률, 2006) , which unified previously separate statutes on corporate reorganization, composition, and bankruptcy. The DRBA, effective since 2006, governs both corporate and individual insolvency. The Seoul Bankruptcy Court (established 2017) provides specialized adjudication. The legal framework draws from German and Japanese insolvency law while incorporating distinctive features developed during the 1997 Asian Financial Crisis.

Debtor Rehabilitation and Bankruptcy Act (DRBA)

The DRBA is divided into five parts, covering corporate rehabilitation, individual rehabilitation, bankruptcy, and international insolvency.

Corporate Rehabilitation (회생절차)

Corporate rehabilitation is the primary restructuring mechanism for financially distressed companies. Key features include:

• Commencement: Petition by the debtor (most common), creditors, or shareholders holding at least 10% of shares
• Automatic stay: Upon commencement, all claims are stayed, and secured creditors are stayed for up to six months
• Management retention: The DIP (debtor-in-possession) system allows existing management to continue operations under court supervision
• Reorganization plan: Proposed within four months, requires creditor approval by class and court confirmation
• Cram-down: The court may confirm a plan even where a class rejects it, subject to the “best interests” and “fair and equitable” tests

Individual Rehabilitation (개인회생)

Individual rehabilitation provides debt discharge for consumer debtors with regular income:

• Eligibility: Total debt under KRW 1.5 billion (approximately USD 1.1 million), excluding tax and tort claims
• Repayment plan: 3–5 years of debt repayment based on disposable income
• Discharge: Remaining debts discharged upon plan completion; certain debts (tax, child support) are non-dischargeable

Bankruptcy (파산)

Traditional liquidation bankruptcy is available for individuals and companies:

• Bankruptcy trustee: Appointed by the court to liquidate assets and distribute proceeds
• Exempt property: Minimum living expenses, small-value household goods, and tools of trade
• Discharge: Available for honest debtors after investigation, with certain debts excluded (taxes, criminal fines, intentional torts)

International Insolvency

The DRBA adopts the UNCITRAL Model Law on Cross-Border Insolvency (Chapter 5), recognizing foreign proceedings and providing for cooperation between Korean and foreign courts.

Pre-Packaged Reorganization

South Korea has developed a “pre-packaged” reorganization practice, where major terms are negotiated with creditors before court filing, expediting the formal process. This mechanism was extensively used in the 2020–2021 COVID-19 restructuring.

Conclusion

South Korean insolvency law provides a comprehensive, modern framework for both corporate and individual debt resolution. The unified DRBA, specialized bankruptcy court, and international insolvency provisions reflect international best practices, while the low individual discharge rate (compared to the US) continues to be debated.