Taking Out a Loan During Personal Rehabilitation Requires Court Approval

From the moment a personal rehabilitation proceeding begins until a discharge order is issued, taking out new loans is in principle impossible.

Once the rehabilitation application is registered with the credit bureau, applicants are immediately rejected in bank loan reviews, and even in exceptional cases requiring urgent funds, separate approval from the competent court is required. Under the Debtor Rehabilitation and Bankruptcy Act, personal rehabilitation is a system in which individuals with secured debts of up to roughly 1 billion won and unsecured debts of up to roughly 500 million won, under court supervision, have remaining debts discharged after carrying out a repayment plan for a standard period of three years, up to a maximum of five. Within this process, however, any act of incurring new debt is treated as shaking the very foundation of the system.

The Reality of Credit Restrictions That Take Effect the Moment You File for Rehabilitation

Financial Institution Loans Blocked by Credit Bureau Registration

Once the rehabilitation proceeding opens, the application and commencement details are registered with the credit bureau. Because financial institutions check this record during loan screening, new loans are effectively blocked across banks, card issuers, and savings banks alike. Even before a commencement order is issued, the 'rehabilitation application' record may already be exposed in credit data, making loan attempts during this period equally pointless.

Existing credit cards and debit cards are also mostly suspended or terminated. When the commencement decision is issued, collection and seizure of unsecured debts are halted, but in exchange the debtor may only manage funds within the framework set by the court. Disposing of assets or entering new financial transactions without court approval constitutes a procedural violation.

Loans Taken Just Before Filing Are Also Scrutinized

The problem does not end with the filing itself. The court closely examines loans and credit card use within one year prior to the application. If it is judged that the debtor borrowed recklessly while aware of worsening debt, this can become grounds for denying discharge. Responding to refinancing loan offers that add debt right before rehabilitation also works against the debtor.

Practical cases confirm the pitfalls. Of funds borrowed just before filing, amounts used to repay personal debts of family members, such as the debtor's mother, must have their use explained separately from repayment of the debtor's own debts, and the rehabilitation trustee may in some cases order that a corresponding portion of those funds be included in the debtor's assets — that is, in the liquidation value. Insufficient explanation of the funds' use leads to disadvantages in the review of the repayment plan.

Exceptional Fund-Raising Possible Only With Court Approval

Requirements and Evidence for the Court Approval Process

If unavoidable expenses such as medical bills or living costs arise during the proceeding, the only legitimate route is to consult the competent court or the asset administrator in advance and obtain approval. At that point, the necessity of the purpose and the feasibility of repayment must be demonstrated. A loan taken without approval, if discovered, results in penalties such as termination of the proceeding or denial of discharge.

The Trap of Private Borrowing and Illegal Brokers

Private borrowing from family or acquaintances carries no legal restriction. However, debts not listed in the repayment plan are excluded from discharge, so the principle is to honestly declare all money borrowed or exchanged. Meanwhile, most advertisements touting "loans available even during rehabilitation" are lures from illegal brokers leading to high-interest private loans or identity-lending schemes, and are subject to reporting to the Financial Supervisory Service.

Scope of Permitted Fund Use at Each Stage and the Purpose of the System

Why New Loans Are Blocked

Personal rehabilitation is structured so that existing creditors accept debt reduction while the debtor makes a fresh start. If a new creditor intervenes, the principle of equality among creditors is broken. New loans collapse the calculation of repayment capacity itself and risk leading to fraudulent acts such as withdrawing and concealing loan proceeds, which is why the system blocks them.

After the repayment plan is approved, the principle is to maintain a livelihood within income after the prescribed repayment amount. If income increases through part-time work or similar means, it must be reported to the court, and an increase in the repayment amount may be demanded. Policy funds such as Microfinance from the Korea Inclusive Finance Agency are also restricted during the rehabilitation process and become accessible only after discharge or completion of repayment.

Discharge and Recovery: When Loan Restrictions Are Lifted

The Reality of Credit Recovery After Completing Repayment

Once repayment is completed and a discharge order is granted, the door to new loans opens again. However, the credit record remains for up to five years after repayment is completed and continues to affect screenings. Building credit starting with small loans is the realistic path. Those who used Credit Counseling & Recovery Service programs tend to receive relatively favorable evaluations.

It is also important to remember that taxes and certain secured debts are excluded from discharge. Loans obtained without approval during rehabilitation may likewise be excluded from discharge benefits, so if funds are truly needed during the proceeding, turning first to the responsible court and a lawyer — not a broker — is the way to reduce both cost and risk. The latest requirements and limits should be verified through official materials from the Supreme Court of Korea and the Financial Supervisory Service.