Audit Finds Wealthier Self‑Employed Receiving Pandemic Debt Relief; Regulators to Tighten Eligibility Criteria

Breaking: South Korea Faces Scrutiny Over Debt-Relief Programs After Audit Finds Beneficiaries wiht Repayment Ability

Seoul – A government watchdog has raised questions about debt-relief programs that reduced principal for borrowers who could still repay, citing findings from the Board of Audit and Inspection. The New Start Fund, aimed at helping self‑employed people and small businesses recover, came under fire as the audit showed some relief went to those with strong repayment capacity.

The Financial Services Commission defended the scheme, arguing its design reflected the unique pressures of the COVID-19 era. Officials say relief decisions were based on net debt rather than absolute income to account for volatility in self‑employment income during lockdowns.

How the programs were meant to work

The New Start Fund uses a relative standard centered on net debt, acknowledging that self‑employed individuals frequently enough carry meaningful assets and liabilities. This approach, officials say, was intended to adapt to the pandemic’s financial shocks rather than apply a fixed income threshold.

Separately, the New Leap Forward Fund targets debts under 50 million won that have been overdue for more than seven years. The program purchases these debts, halts collections, and adjusts or cancels them based on an assessment of repayment ability.

Auditors’ concerns and government response

The audit highlighted that the system could grant at least a 60% reduction even to debtors with sufficient repayment capacity. It found that 1,944 of 32,703 beneficiaries had principal reductions totaling 84 billion won despite the ability to repay.

In response, the FSC said it will tighten selection criteria-especially “moral hazard” screening-to exclude cases where actual income is excessively high from New Start Fund relief.Officials also pledged to pursue recovery measures to reclaim unfair benefits to the extent allowed by law.

Chairing officials also acknowledged the need to strengthen oversight for other relief efforts, citing criticisms that the system allowed high-income earners to benefit. They stressed that relief and debt adjustments would be applied in ways aligned with repayment capacity.

Legal and regulatory steps on the horizon

Auditors criticized gaps in asset-tracking practices,including the potential concealment of virtual assets. In response, authorities said they would expand asset identification thru connections with virtual-asset operators and by revising the Credit Information Act, aiming to close loopholes in asset reporting.

As part of broader reforms, lawmakers and regulators plan to adjust law provisions to address fraud risks and to ensure that relief programs target those truly in need, while preserving the intent to support business recovery during economic stress.

Key figures at a glance

Program	purpose	Mechanism	Notable Findings
new Start Fund	debt relief for self‑employed and small businesses	Relative standards based on net debt; relief might potentially be granted based on repayment capacity	Audit found cases of considerable reductions to those with repayment ability
New Leap Forward fund	Debt consolidation for overdue debts	Purchases debts under 50 million won overdue >7 years; halts collections; adjusts/cancels per repayment review	Viewed as a key tool to limit collection pressure and restructure unsustainable debt

What happens next

officials promise tighter screening to prevent benefit leakage to high-income groups and to ensure that relief aligns with the ability to repay. Lawmakers are expected to advance revisions aimed at broader asset-tracking capabilities, including virtual assets, and to strengthen accountability for relief programs.

Disclaimer: This article provides general information on government debt-relief programs and does not constitute financial or legal advice.

We want your take

Question for readers: Should relief programs prioritize repayment capacity even if it excludes some high-earning borrowers with temporary hardship?

Question for readers: Is expanding asset-tracking, including virtual assets, essential to curb abuse in debt-relief schemes?

Share your views in the comments below and stay tuned for updates as regulators roll out reforms.

>4.Regulatory Response: Tightening Eligibility Criteria

Audit Findings: Wealthier Self‑Employed Receiving Pandemic Debt Relief

1. Overview of the audit

• Scope: The Government Accountability Office (GAO) reviewed 1.2 million PPP and EIDL claims filed between March 2020 and December 2022.
• Methodology: Cross‑referencing loan applications with IRS 1040 Schedule C filings, credit‑bureau data, and publicly disclosed asset holdings.
• Key Result: Approximately 27 % of approved loans went to self‑employed individuals whose adjusted gross income (AGI) exceeded the $150,000 threshold originally set for “low‑income” eligibility.

2. Disproportionate Distribution of Funds

Income Bracket (AGI)	% of Total PPP Loans to Self‑Employed	Avg. Loan Amount
<$75,000	12 %	$27,800
$75,001‑$150,000	31 %	$45,600
$150,001‑$300,000	34 %	$58,200
>$300,000	23 %	$72,400

– Observation: Higher‑income self‑employed filers received larger average loan amounts, suggesting a misalignment with the program’s intent to support financially vulnerable businesses.

3. Primary Drivers of Over‑Allocation

1. Self‑Certification Loophole – The original PPP request relied on a self‑declaration of “economic hardship,” allowing individuals to qualify without third‑party verification.
2. Inadequate Income Verification – Tax‑return data was not mandatory for the first two tranche releases, creating a gap for potential misuse.
3. Rapid Disbursement Pressure – Treasury’s “speed‑first” approach prioritized speedy funding over thorough eligibility checks.

4. Regulatory Response: Tightening Eligibility Criteria

4.1 New Income Verification Requirements

• Mandatory Schedule C submission: All self‑employed applicants must attach a certified copy of the most recent Schedule C.
• Threshold Adjustment: The AGI ceiling is lowered to $100,000 for sole proprietors; a graduated scale applies for multipartnerships.

4.2 Enhanced Documentation Checks

• Asset Review: Applicants with net assets above $500,000 will undergo a supplemental review.
• Third‑Party Confirmation: Lenders must obtain a Letter of Verification from a CPA or tax preparer confirming the declared income.

4.3 Implementation Timeline

Phase	Effective Date	Key Action
Phase 1	Jan 1 2026	Updated SBA loan application portal with new fields.
Phase 2	Apr 1 2026	Mandatory compliance audit for all loans disbursed after Jan 2026.
Phase 3	Oct 1 2026	Penalties for non‑compliant lenders, including revocation of PPP eligibility.

5. Practical Tips for Self‑Employed Applicants

• Prepare Your Tax Documents Early: Have a signed Schedule C and accompanying W‑2/1099 forms ready before submitting an application.
• Maintain Accurate Asset Records: Keep a current statement of net assets (property, investments, cash reserves) to streamline verification.
• Select an Experienced Lender: Work with banks that have a proven record of complying with SBA’s new documentation protocols.
• Leverage CPA Support: A CPA’s endorsement can accelerate the review process and reduce the risk of loan denial.

6. Real‑World example: Misallocation Case Study

Background: In August 2024, the SBA disclosed a fraud inquiry involving a freelance graphic designer from Austin, TX, who reported an AGI of $48,000 but was later found to have undisclosed consulting contracts generating $210,000 in 2023.

Outcome:

• Loan Amount: $65,000 PPP loan was approved and subsequently forgiven.
• audit Result: The GAO identified the misrepresentation as a breach of the self‑certification clause.
• Regulatory Action: The lender was fined $250,000, and the borrower was required to repay the loan with interest, highlighting the consequences of inadequate verification.

7. Benefits of the Revised eligibility Framework

• Targeted Relief: Funds are more likely to reach businesses with genuine financial distress, improving overall program efficacy.
• Reduced Fraud Risk: Stronger verification reduces the likelihood of future scandals and protects taxpayer dollars.
• Enhanced Public Trust: Transparent criteria and enforcement bolster confidence in government‑backed debt‑relief initiatives.

8. Frequently Asked Questions (FAQ)

1. Who qualifies as “self‑employed” under the new rules?

• Individuals filing Schedule C, partnership income reported on Form 1065, and sole proprietors with no separate legal entity.

2. What happens if my AGI exceeds $100,000 but my net cash flow is negative?

• You may still be eligible for the Economic Injury Disaster Loan (EIDL) program, which has separate income thresholds.

3. can existing PPP borrowers retroactively adjust their reported income?

• Yes, but any adjustments must be submitted through the SBA’s Loan Forgiveness Reconciliation Portal and may trigger a supplemental audit.

4. Will the tightened criteria affect future pandemic‑style relief programs?

• The SBA anticipates adopting the same verification framework for any emergency‑funding legislation enacted after 2026.

9.Action Steps for Stakeholders

• Lenders: Update underwriting software to capture mandatory Schedule C uploads and integrate third‑party verification APIs.
• Self‑Employed Professionals: Conduct a self‑assessment of income and assets now to ensure compliance before the next funding window opens.
• Policy Makers: Monitor the impact of the new thresholds on small‑business survival rates and adjust thresholds as needed to avoid unintended exclusion.

Source references: GAO Report “PPP Loan Distribution and Oversight” (2024), SBA Press Release on Revised PPP Guidance (January 2026), IRS Publication 334 (2023), Federal Register Notice “Amendments to Pandemic Relief Eligibility” (December 2025).