The legal basis and routine prevention of personal loan workout!

Debt Restructuring

ZHIHENG

Recently, illegal loan intermediaries have been posting on social media under the guise of “debt restructuring” and “debt optimization,” luring debtors into “borrowing new to repay old” or applying for “high-interest bridge financing.” This so-called “restructuring” and “optimization” not only harbors risks such as exorbitant fees and personal information leaks, but may also lead individuals to unwittingly participate in fraudulent or other criminal activities.

To this end, the National Administration of Financial Regulation has issued a specific risk warning, urging the general public to understand the true nature of such matters and guard against potential risks.

1. Legal basis for debt restructuring

Financial institutions under local financial regulation typically do not hold a financial license; instead, they are issued with a registration certificate or an approval document by the regulatory authority.The local financial regulatory authority is responsible for the day-to-day supervision of microfinance companies, financing guarantee companies, regional equity markets, pawnshops, financial leasing companies, commercial factoring companies, local asset management companies, and financial factor markets that are registered and established in the locality.

The most direct legal basis for the “restructuring” of personal loans is the Interim Measures for the Administration of Personal Loans, issued by the former China Banking Regulatory Commission in 2010. Article 40 of these measures stipulates: “For loans that have not been repaid in accordance with the terms of the loan contract, the lender shall take measures to recover the debt or enter into a restructuring agreement.”

In 2012, the Ministry of Finance and the former China Banking Regulatory Commission jointly issued the “Administrative Measures for the Bulk Transfer of Non-Performing Assets by Financial Institutions,” which stipulates that individual loans may not be transferred in bulk (including housing loans, auto loans, student loans, credit card overdrafts, and other consumer loans—essentially all types of loans where individuals are the borrowers).

In 2021, the former China Banking and Insurance Regulatory Commission issued the “Notice on Launching a Pilot Program for the Transfer of Non-Performing Loans,” which authorized pilot programs for the transfer of single-account corporate non-performing loans and the bulk transfer of individual non-performing loans.

In 2022, the former China Banking and Insurance Regulatory Commission issued the “Notice on Launching the Second Batch of Pilot Programs for the Transfer of Non-Performing Loans,” which stipulated that “asset management companies may not transfer individual non-performing loans to third parties after acquiring them.”

In 2024, the National Administration of Financial Regulation issued the “Administrative Measures for Non-Performing Asset Business of Financial Asset Management Companies,” which clearly stipulates the methods by which financial asset management companies may restructure debt claims.

2. Methods of debt restructuring

Personal debt restructuring is generally intended for individuals who, for various reasons, are unable to repay their debts on time.Personal debt restructuring provides a legal and effective avenue for debtors to regain control of their financial situation and avoid further financial crises.

The “Administrative Measures for the Non-Performing Asset Business of Financial Asset Management Companies” stipulates that “when a financial asset management company restructures its claims, it may adopt methods such as debt-for-asset swaps, modification of debt terms, asset exchanges, or a combination thereof.” In addition, common debt restructuring methods include extending the repayment period, lowering the interest rate, reducing the principal, and consolidating debts.

It is important to note that the restructuring described in the preceding section of this document complies with applicable laws, regulations, and rules, and is a restructuring agreed upon through direct negotiation between the lending institution and the debtor. Illegal organizations or individuals often exploit debtors’ lack of knowledge of laws, regulations, and financial management rules, as well as their desire to quickly resolve their debts or even evade them. They make exaggerated and false claims about having close ties with certain influential figures, possessing substantial financial resources, or having previously helped others resolve similar issues, thereby deceiving and manipulating a wide range of debtors.

If you’re facing debt issues, you can absolutely handle them yourself by negotiating directly with the financial institutions, because the one who can truly resolve your debt problems is you—certainly not a third-party agency.

3. The "restructuring" schemes of illegal institutions or individuals

1. Publicly promoting the ability to “settle loans at 40% off or even lower” At this point, illegal organizations or individuals often require debtors to pay an initial sum of money under the guise of handling fees, purchasing debts, or settling outstanding liabilities.

2. Boasting about being able to “repair personal credit reports”

At this stage, illegal organizations or individuals typically require debtors to pay fees under the guise of handling charges, facilitation fees, or similar expenses.

3. Encouraging debtors to “borrow new to repay old”

Illegal loan intermediaries, under the guise of “debt restructuring” or “solving debt problems,” recommend “credit loans” to borrowers who are under significant repayment pressure or are already in default, and facilitate the issuance of such loans by lending institutions to “refinance” their existing debts. Loan brokers charge exorbitant fees based on the borrower’s credit profile.

4. Offering “high-interest financing.”

Illegal loan intermediaries, under the guise of helping debtors “improve their credit reports,” lure debtors into applying for bridging loans from them, only to then assist the debtors in obtaining new loans to repay those bridging loans. In this process, illegal loan intermediaries first charge a hefty advance funding fee, and after the loan is approved, they collect another substantial service fee based on a percentage of the loan amount.

4. Deconstruction of the "debt restructuring" scam

In the aforementioned schemes, “settling the loan at a 60% discount or even lower” and “repairing one’s personal credit report” are very likely scams. “Borrowing new to repay old” and “high-interest bridging finance” constitute a form of “reaping the unwary” that exploits debtors’ information asymmetry or their urgent need to resolve debt issues.

1. “Pay off the loan at 40% of its value or even a lower discount”

If the loan is being collected by the lending institution itself, “settling the loan at 40% of the outstanding balance or even a lower discount” would only occur under extreme circumstances. For example, your interest, default penalties, and late fees may already exceed the principal amount, yet some lenders only require borrowers to repay the principal, waiving the interest, default penalties, and late fees. At this point, it’s equally feasible for you to approach a lending institution directly to discuss the matter. In addition, the likelihood of success is extremely low.

If it involves a financial asset management company disposing of a portfolio of individual non-performing debt claims, that is possible. However, third-party intermediaries or individuals cannot purchase your single claim directly through a financial asset management company, because individual non-performing loans can only be transferred in bulk.

2. “Repair personal credit report”

Article 20 of the “Administrative Measures for Credit Reporting Business” stipulates that “the retention period for an individual’s adverse information collected by a credit reporting agency shall be five years from the date on which the adverse behavior or event ceases.” Article 27 of the Regulations on the Administration of the Credit Reporting Industry stipulates: “The State shall establish a financial information infrastructure database… The financial credit information infrastructure database shall be constructed, operated, and maintained by a specialized operating entity,” which is the Credit Reference Center of the People’s Bank of China.

Would you really believe a social intermediary or an individual who claims they can arbitrarily alter data held by the People’s Bank of China’s Credit Reference Center? If that were truly the case, wouldn’t our country’s financial system have no credibility whatsoever? Would you still dare to keep your money in a bank?

3. “Borrowing new to repay old” and “high-interest financing”

This is exactly “reaping theChives”—it may temporarily ease your stress, but the debt remains and keeps snowballing, leaving the underlying problem completely unresolved.

ZHIHENG

Attorney Profile

ZHI HENG 

Liu Taibo

Full-time lawyer at Zhiheng (Chongqing) Law Firm

Areas of Expertise:

Investment and Financing

Asset Restructuring

Debt Risk Resolution

Business Dispute

This article and its contents are shared by Zhiheng Chongqing Law Firm for informational purposes only and do not constitute legal opinions, advice, or a basis for decision-making by the firm or its attorneys. If you require legal advice or a professional legal analysis, please contact the experienced attorneys at Zhiheng (Chongqing) Law Firm, or leave your contact information via private message on our WeChat official account. If you wish to reprint this article, please contact the official account editor via the backend.

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