The government has rejected calls for more regulation of firms that market individual voluntary arrangements, known as IVAs, to people with debts.
Minister Jim Fitzpatrick suggests banks are partly to blame for their bad debts.
Banks have been lobbying for stricter controls, claiming their own losses from bad debts have been due partly to unscrupulous marketing of IVAs.
But Department of Trade and Industry minister Jim Fitzpatrick has said banks should lend money more carefully.
IVAs are an alternative to bankruptcy that let people settle their debts.
Speaking to the Financial Times, Mr Fitzpatrick said: "If we've got a rise in indebtedness, if we've got a rise in people having difficulty in servicing that debt... then maybe the banks are lending too much money or maybe they're not being as careful as they used to be in scrutinising the applications."
He added: "If they'd not lent it in the first place then they wouldn't be in the difficulty of trying to recover it."
Bad debts and insolvencies
In the UK, banks wrote off £3.3bn in bad debts in the first half of this year.
But they fear that part of this rise was due to people using IVAs as an easy escape route from repaying their debts in full.
They have pointed to a big rise in the popularity of IVAs, widely advertised on TV and in newspapers, as one reason for the general surge in personal insolvencies.
In England and Wales, 26,000 people became insolvent during the second quarter of 2006 - 66% more than during the same period last year.
Although two-thirds of those people declared themselves bankrupt, the rest took out IVAs, which let them come to a voluntary agreement with their lenders.
Debt management companies have spotted the rapid growth in personal indebtedness as an opportunity to develop a thriving business, charging people for advice on how to deal with their debts and often helping them to set up an IVA with their creditors.
Although anyone claiming to be an insolvency expert is regulated, advertisements and call centre staff are not.
However, the government does not accept there is a problem it should tackle.
Its own Insolvency Service says that only about 5% of the clients of debt management companies actually end up in an IVA.