The number of insolvencies is predicted to increase in 2008
The government has set out a new code governing Individual Voluntary Arrangements (IVAs), a controversial alternative to bankruptcy.
The Insolvency Service hopes the IVA protocol, which has been agreed with industry, will make the process more transparent and predictable.
Some providers have been criticised for misleading consumers about the suitability of IVAs.
Consumer groups have given the protocol a cautious welcome.
An IVA is a formal and legally binding agreement made between a debtor and creditors in England or Wales, under which the debts are frozen.
In return, the debtor agrees to pay back a certain amount every month for a set period, usually five years, after which the remainder of the debt is written off.
IVAs were originally designed to offer an alternative to bankruptcy for small businesses that got into financial difficulty, but they have proved increasingly popular with individuals.
There were more than 44,331 IVAs taken out in 2006, compared with fewer than 5,000 in 1998.
The figures began to fall during 2007, but are expected to rise again during 2008.
At the same time, the number of firms offering to arrange IVAs has also grown sharply.
Many debt advisers, and even some of the major High Street banks, have expressed concern about the aggressive way in which IVAs have been marketed and about the scale of the fees they generate.
In January 2007, the Office of Fair Trading ordered a number of companies to change adverts which it felt were misleading.
But many consumer groups remained worried that the wrong people were being encouraged to take out IVAs.
The new protocol is a voluntary code of conduct designed by a working group comprising IVA providers, creditors, consumer representatives and the government's Insolvency Service.
"The Insolvency Service has facilitated a process which has successfully produced a voluntary code for IVAs to reflect the changing needs of the market," said Pat McFadden, the government minister responsible for the Insolvency Service.
"It will provide greater transparency for creditors and debtors alike by using standard clauses and a consistent format.
"Today's protocol is a significant achievement for everyone involved," he added.
The British Bankers' Association (BBA) said the protocol should help restore consumer faith in IVAs.
"People in debt and their creditors need to know that when an IVA is proposed, it is the most appropriate solution," said BBA chief executive Angela Knight.
"The BBA, the Insolvency Service and the participating IVA providers are united in support for this agreement, which should provide customers with the reassurances they need in order to make the right choice for their financial futures," she added.
The government said the protocol should ensure that:
- debtors will be asked to detail their income and outgoings in a standardised financial statement
- insolvency practitioners will carry out more stringent checks on income and mortgage repayments
- debtors will be encouraged to try to reach an informal agreement with their creditors before being recommended for an IVA
- there will be an agreement as to when debtors will be deemed to have failed to meet the terms of the IVA, should they get into arrears with monthly repayments.
- a lender who rejects an IVA proposal will need to give a specific explanation for the rejection.
The government added that the operation of protocol would be closely monitored and reviewed by a standing committee.
The Consumer Credit Counselling Service (CCCS) - which launched its own IVA for its advice clients in April 2007 - welcomed the announcement.
"The protocol is no panacea, but it is a vitally important first step in which the Insolvency Service has played a key role," said CCCS chairman Malcolm Hurlston.
"We shall track with interest whether lenders will now scrap the hurdle rates which have often held back IVAs in other suitable cases.
"Similarly, we shall want to see in practice the degree of transparency promised," he added.
Martin Lewis, from Moneysavingexpert.com, also gave muted support.
"The IVA industry has grown quickly and been hugely profitable, some companies making £5,000 a pop per IVA," he said.
"Hardcore promotion has brought in many unwary consumers falling for the sell of 'a loophole to wipe 75% off your debts', yet the reality is that IVAs are a cut down version of bankruptcy, suitable for only a few.
"A voluntary code seems a weak system to address this industry, but its better than nothing," he added.