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President Lee Jae-myung’s signature campaign pledge to launch a “bad bank” for distressed debt relief is now moving into action. Backed by the recently approved second supplementary budget, the program aims to support financially vulnerable individuals hit hard by the COVID-19 aftermath, rising interest rates, inflation, and economic downturn.

The Financial Services Commission (FSC) confirmed on July 4 that ₩1.1 trillion was approved in the second extra budget, including ₩400 billion allocated to the bad bank initiative. The newly created program will focus on purchasing and canceling long-term delinquent loans under strict eligibility rules to prevent moral hazard and ensure fairness.

The program targets individual unsecured debts that have been delinquent for over seven years and are under ₩50 million. These debts will be purchased in bulk and either canceled or adjusted following thorough reviews of the borrower’s income and assets.

The FSC expects to purchase a total of ₩16.4 trillion in overdue loans, potentially benefiting around 1.13 million people. This is intended to alleviate the debt burden of low-income earners and small business owners and provide them with a fresh financial start.

To address concerns about fairness, the FSC clarified that loans related to stock investment, gambling, or adult entertainment businesses will be excluded from relief. This was in response to criticism that public funds might be used to write off irresponsible or speculative debt.

FSC Chairman Kim Byung-hwan previously told the National Assembly’s Political Affairs Committee that “debt relief should not be misunderstood as a blanket debt cancellation,” adding that even gambling-related debts will be carefully scrutinized.

Officials emphasized that only borrowers with no realistic repayment capacity—comparable to bankruptcy—would be eligible. The screening will be rigorous to ensure that only the truly vulnerable receive help.

Of the ₩800 billion required for the long-term delinquent debt relief program, ₩400 billion was secured in this round of supplementary funding. The remainder is expected to come primarily from private financial institutions.

Detailed implementation plans for the program are expected in the third or fourth quarter.

Meanwhile, the government also increased funding for other debt relief initiatives: ₩700 billion for the Small Business and Self-Employed Debt Adjustment Program, which will expand eligibility for the New Start Fund and strengthen support for low-income borrowers; and ₩3.5 billion for legal representation support to victims of illegal private lenders.

An FSC official stated, “Given the tough conditions facing everyday citizens, we will execute the supplementary budget quickly and efficiently while ensuring that the effects of the policy are felt in people’s daily lives.”