Government to Clear KRW 2.2 Trillion in Small Business Guaranteed Debt, Reopening Paths to Recovery Blocked by Arrears

'Establishment Plan for a Sustainable Guarantee Support System' Announced on June 19… Clearing Approx. 130,000 Businesses via Distressed Asset Write-offs and Debt Adjustments, Permitting New Guarantees for Small Businesses with Cleared Public Records and Bankruptcy Exemptions

Government Announces Comprehensive Overhaul Plan for Small Business Guarantee System

The South Korean government has unveiled a comprehensive package of measures to clear distressed small business guarantees that surged rapidly during the COVID-19 pandemic, while reopening guarantee channels for small businesses whose recovery has been stalled by debt burdens. During the Emergency Economic Headquarters meeting and Economic Ministers' Meeting presided over by Deputy Prime Minister and Minister of Economy and Finance Koo Yun-cheol on June 19, related ministries including the Ministry of SMEs and Startups announced the 'Establishment Plan for a Sustainable Guarantee Support System to Support the Recovery and Growth of Small Businesses.'

The initiative rests on two main pillars. The first is to alleviate the debt burden of vulnerable small businesses by clearing difficult-to-repay guaranteed distressed assets. The second is to pave the way for small businesses that were previously unable to receive guarantees due to arrears, business closures, or bankruptcy to resume operations once their debt restructuring is completed. At the same time, the government decided to overhaul the guarantee system itself to restore the financial soundness of the Regional Credit Guarantee Foundations and the Korea Credit Guarantee Foundation Federation, which were strained during the COVID-19 response process.

The core indicator cited by the government as the background for the system overhaul is the subrogation rate. This refers to the ratio of debts that guarantee institutions had to repay on behalf of small businesses that defaulted, which soared to 5.07% by the end of 2025. Through this measure, the government aims to lower this figure to 3.2% by the end of 2030, while simultaneously expanding the proportion of guarantee supplies to non-capital regions from 65.4% (based on data released in June 2026) to 70% to address the concentration of guarantees in the Seoul metropolitan area.

KRW 2.2 Trillion in Unpayable Guaranteed Debt to Be Cleared Over 5 Years… Targeting Approx. 130,000 Businesses

The first pillar focuses on clearing the distressed guarantee assets of small businesses that have lost their repayment capacity. The government has decided to clear a total of KRW 2.2 trillion in distressed assets over a five-year period from 2026 to 2030, targeting an estimated 130,000 businesses. This measure will write off or adjust the debt of claims that remained as subrogated claims of guarantee institutions after business failures prevented repayment following receipt of guarantees.

Specifically, the write-off requirements for Regional Credit Guarantee Foundations will be relaxed to increase internal write-offs from KRW 800 billion to KRW 1.1 trillion. Combined with the sale of distressed assets to the New Start Fund and the New Leap Fund, the government calculates that KRW 2.2 trillion will be cleared over five years. Eradicating unpayable claims from the ledger will restore the financial soundness of guarantee institutions while freeing individual small businesses from lifelong debt burdens.

Relief measures are also included not only for principal debtors but also for co-obligors who shared responsibility. The government plans to pursue measures to reduce or exempt the debt of joint sureties when the principal debtor undergoes personal rehabilitation or bankruptcy exemption. However, this aspect requires legislative action, and specific application criteria and implementation timelines have not yet been finalized. The government plans to draft and submit bills for legislative tasks by the fourth quarter of this year, while swiftly executing other policy tasks starting in the second half of the year.

Guarantees Blocked by Arrears Restored… New Guarantees Permitted for Public Record Clearance and Bankruptcy Exemption Holders

The second pillar—and the aspect most tangible to small business owners in the field—is 'recovery guarantees.' Previously, small businesses that fell into arrears on guaranteed loans or experienced business closures and bankruptcies were effectively barred from starting new businesses because they could not obtain new guarantees even after sorting out their debts. Once their credit was stained, financial channels for a restart were closed.

The government is opening up these blocked paths. New guarantees will be permitted for written-off businesses whose public registration has been lifted following debt adjustment. For bankruptcy-exempt individuals whose claims have not yet been written off, a rapid write-off procedure will pave the way for them to receive new guarantees. The system is being revised so that individuals who have cleared their debts are not branded as permanent financial outcasts, allowing them to restart operations with fresh guarantees once debt clearance is complete.

Additionally, a preemptive support system will be newly introduced to identify and assist small businesses showing signs of distress in advance. The repayment status of borrowers utilizing guarantees will be constantly monitored to identify those at high risk of distress, connecting them seamlessly through guidance, counseling, business diagnosis, recovery training, and guarantee support. This approach reaches out before debt completely collapses. Furthermore, special guarantees for small businesses affected by indirect disasters, as well as special guarantees for credit-vulnerable and population-declining regions, will be newly established to broaden financial accessibility for vulnerable groups.

Full Guarantees Prohibited in Principle… Soundness Enhanced via 90% Guarantee Rate and 30% Re-Guarantee Rate

To underpin recovery support and distress clearance, the foundational strength of the guarantee system will also be reinforced. The core is the reduction of full guarantees. The government will prohibit full guarantees in principle, lowering the average guarantee rate of Regional Credit Guarantee Foundations from 94.3% (based on June 2026 announcement data) to approximately 90% by the end of 2027. Full guarantees, which currently account for 48.3% of new supplies by regional credit guarantees, will henceforth be permitted only on a limited basis when there is a strong policy necessity, such as disaster guarantees, second-chance guarantees, and low-credit holder guarantees.

The re-guarantee system, which re-guarantees bonds guaranteed by guarantee institutions, will also be revised. The re-guarantee rate, which currently applies at an average level of around 50% for new guarantees, will be lowered to approximately 30%. However, a re-guarantee rate of 50% to 60% will be maintained for mid- to low-credit guarantee products to prevent any contraction in financial support for vulnerable groups who need guarantees the most. The system is designed to elevate accountability while shielding vulnerable classes.

Guarantee Limit Relaxed and IP Guarantees for Growth-Oriented Small Businesses… KRW 2 Trillion in Region-Specific Guarantees Supplied

This initiative goes beyond cleaning up debt by laying down a growth ladder. The government will introduce a 'Region-Specific Guarantee Open Competition Scheme' in collaboration with local governments to supply KRW 2 trillion in region-specific guarantees by 2030. Special guarantees supporting commercial district-wide joint growth and a KRW 200 billion vitality loan for alleyway small businesses will also be promoted. The overarching direction is to shift the weight of guarantees back toward non-capital regions and alleyway commercial districts.

Doors are also widening for small businesses with growth potential. The government plans to relax current guarantee limit regulations—set at KRW 800 million—for growth-oriented small businesses and newly introduce intellectual property (IP) guarantees allowing businesses to secure guarantees backed by intellectual property. This measure ensures that small businesses with increasing sales and expansion plans are not hindered by guarantee ceilings.

Response Strategies by Business Operator Type

Action items under this overhaul vary depending on an operator's current situation. Small business owners currently in arrears on guaranteed loans or lacking repayment capacity due to business failure should first check whether they qualify for debt adjustment and distressed asset write-offs through the New Start Fund and New Leap Fund. Resolving debt not only eases burdens but also opens doors to acquiring new guarantees after public records are cleared.

For small businesses that have already closed or received bankruptcy exemptions, the key elements are rapid write-off procedures and permission for new guarantees. As the 'guarantee impossibility' that previously acted as the biggest obstacle to business restart is lifted, it is advantageous to pre-design debt settlement stages and new guarantee application timelines. Those carrying joint surety burdens should monitor progress on debt reduction and exemptions linked to the personal rehabilitation and bankruptcy exemption status of the principal debtor.

Growth-oriented small businesses currently operating normally face a different path. With full guarantees scaling down, strategies must shift away from simple guarantee reliance toward utilizing growth support tools such as relaxed guarantee limits, IP guarantees, and region-specific guarantees. Those operating in non-capital regions or grounded in local commercial districts have a high likelihood of benefiting from the region-specific guarantee open competition scheme.

Pre-Application Checklist

Items for small business owners to review at this stage are clear. First, check whether your guarantee or loan is in arrears or distress, and whether you qualify for debt adjustment or write-offs. Second, if you have a history of business closure or bankruptcy exemption, verify whether your public record registration has been lifted and determine the eligible timing to apply for new guarantees. Third, if you are a business operator in a growth stage, keep track of implementation timelines for new systems such as relaxed guarantee limits and IP guarantees.

However, as these measures are currently in the announcement stage, detailed implementation standards, application procedures, and eligibility requirements will be materialized through follow-up notices and legislation. Debt adjustments should be verified through the New Start Fund (call center 1660-1378), while guarantee-related inquiries should be directed to local Regional Credit Guarantee Foundations and the Korea Credit Guarantee Foundation Federation in your jurisdiction. It is essential to check detailed notices to be released following the official rollout of the system in the second half of this year.