The under-fire Child Support Agency is to be completely overhauled, Work Secretary John Hutton has told MPs.
Ministers admit the system is failing children and parents
He said the CSA's performance was "unacceptable" and a root-and-branch review of the UK's child support system would be completed by the summer.
In the short term, private debt collectors will be used to help recover arrears of £3bn and the agency given more powers to chase absent parents.
But the Lib Dems said ministers had made a "shambles" of reviewing the CSA.
The Conservatives accused ministers of lacking leadership on the issue.
The CSA, the subject of criticism about its effectiveness since it was established in 1993, has been described as failing by Tony Blair.
Private debt collectors to help recoup overdue payments
More powers for CSA to check parents' finances
Liverpool City Council boss Sir David Henshaw to review entire child support system
Plans for redesigned system to be put before ministers by the summer
Mr Hutton said £3bn had been spent on its administration but there was "little evidence to suggest outcomes are any better" than when payment collections were handled by the courts.
He announced he was making £90m available over the next three years to support short-term recovery and a further £30m to help contract out some debt recovery.
Mr Hutton told the Commons: "We should be suspicious of simple solutions because there are none.
'Not fit for purpose'
"Walking away is not the answer, neither is handing over the work of the CSA in its existing structure to another government department.
"It's time for fundamental change. Neither the agency nor the policy is fit for purpose."
Figures show the CSA spent more on debt recovery last year than it made back.
New cases are taking 470 days to process and less than two-thirds of maintenance due is being collected from absent parents.
Mr Hutton said: "Relationships come to an end, but responsibilities do not."
However, it was possible the government could stop handling collections where parents had put their own "arrangements in place", he added.
Critics say the CSA cannot handle the three separate tasks of assessing how much an absent parent should pay, collecting the money, and taking enforcement action against non-payers.
Stephen Geraghty, the agency's chief executive, was asked last year to come up with a way of salvaging the system - but his ideas were rejected as too expensive.
Ministers have now asked Sir David Henshaw, the out-going Liverpool City Council chief executive, to redesign the child support system by July.
Under interim measures, CSA investigators will be able to obtain credit card and other confidential financial information to help trace absent parents.
But plans for sanctions such as electronic tagging and community service orders have been put on hold until after the review, because they would require an Act of Parliament.
Shadow work and pensions secretary Philip Hammond said: "The truth is that while the decision to redesign the system from scratch may be the right one, the government must accept responsibility for the lamentable failure to get to grips with this problem much earlier."
Lib Dem work and pensions spokesman David Laws, who has called for the CSA to be scrapped, said: "The prime minister said there needed to be urgent reform in 1998.
"We are still awaiting a clear decision about what that urgent reform is."
Mike Weir, for the SNP, said: "Undoubtedly stronger enforcement is essential but it is not clear that private debt collectors will do any better."