Plans are shaping up for a household debt write-off, one of the key campaign pledges of President Park Geun-hye. The Financial Services Commission is planning to launch an 870 billion won debt-rescheduling fund as early as the end of this month.

The envisioned fund, dubbed the “People’s Happiness Fund,” will purchase overdue debts from financial companies and then write them down so that delinquent borrowers can resume debt repayment.

Eligible for the debt rescheduling program are people who have been in arrears with their loans, which do not exceed 100 million won, for more than six months as of February. The FSC estimates the number of such households at 1.12 million.

The FSC plans to encourage all types of financial companies ― banks, credit card firms, insurance companies, savings banks and even private money lenders ― to participate in the program, given that many households owe debt to multiple lenders.

Participating financial companies will be required to sell their soured assets at highly discounted prices. The FSC plans to pay them between 4 percent and 8 percent of the nonperforming loans’ nominal value.

Then the fund will write off up to 70 percent of debts for low-income people and 50 percent for middle-income households. It will also allow borrowers to repay remaining debt in installments over longer periods of time.

This way, the fund will be able to purchase a maximum of 22 trillion won worth of bad debt with the seed money, which will all come from Korea Asset Management Corp. The FSC said the fund’s capital would be increased, if necessary.

On the campaign trail, Park suggested she would initially set up a 1.8 trillion won fund and expand its resources up to 18 trillion won by having KAMCO issue bonds. She said her plan would benefit some 3.2 million people.

The debt write-down scheme has raised concerns as well as expectations. Many hope that the program puts the brakes on the nation’s mounting household debt.

Korea’s household debt reached a record 959.4 trillion won ($997.2 billion) as of the end of December, a figure that amounts to some 80 percent of the nation’s gross domestic product in 2011.

The huge debt bomb not only chokes consumption and slows economic growth, but also poses systemic risks to the economy. So it is appropriate that the new government is rolling up its sleeves to tackle the debt problem.

However, the initiative is not without its downsides. It could let down honest people who have thus far worked hard to pay back their debt. More importantly, it could create a moral hazard among indebted households.

The scheme could weaken the incentives for debtors to repay their debt by misleading them into thinking that the government will clear their debts again in the future.

We already hear about a rise in the household loan default rate and an increase in individual applications for debt workout.

To minimize these and other negative effects, the FSC needs to speed up the establishment of the fund. At the same time, it needs to make thorough preparations before starting to receive applications for bailout.

To prevent moral hazard, the commission will have to draw up strict criteria for selecting eligible households and assessing their ability to repay. It should limit the benefit of a debt write-down to people who have the will to pay off their debt and stand on their own feet again.

It also needs to make it clear that there will be no more debt rescheduling in the future. Otherwise, the well-intended scheme could end up producing more delinquent households.

And penalties should be worked out for those who are granted debt restructuring but fail to pay off their remaining debt.

The government should bear in mind that the planned bailout program cannot be a fundamental solution to the household debt problem. The best solution is to increase household income. For this, the government should promote job creation and come up with measures that can increase labor’s share of national income.