Borrowers will be allowed to stop repaying debts by taking out a court order, under radical plans outlined yesterday by the Government.

The proposals would mark the biggest shake-up of personal insolvency legislation in years and come at a sensitive time for the financial services industry, which is bracing for an increase in consumer bad debts.

The plans, which were outlined in a consultation paper yesterday by the Ministry of Justice, would allow consumers who fall into financial difficulties through a change of circumstance, such as losing their job or divorce, to stop making repayments on personal loans, credit cards and other debts for up to a year by applying for an “enforcement restriction order” (ERO).

Bridget Prentice, the Civil Justice Minister, said: “We want to ensure that people who run up debts are given every opportunity to pay them off.”

There would be no upper limit on the debts on which a borrower could stop making repayments under the terms of an ERO but the borrower would have to show that he or she could start to make repayments when the ERO came to an end. The fee for setting up an ERO has not been decided.

The interest on borrowers’ debts would, in most cases, continue to accrue during an ERO but borrowers would not be charged penalty charges or other fees while an order was in force.

The consultation says that all enforcement action by creditors would be stopped during the order and payments cease in most cases.

Not all debts would be included. Borrowers would still have to meet child maintenance payments, student loan payments and mortgage payments, as well as any fines that they might incur. Utility bills, rent arrears and council tax may also be excluded.

A spokesman from the Ministry of Justice said: “It is not the Government’s intention that the ERO will provide an interest ‘holiday’.”

However, qualifying creditors — those whose debts are able to be brought into an ERO — are specifically prohibited from making any other charge while the ERO is or was in force. The consultation, which has been launched as part of the Tribunals Courts and Enforcement Act 2007, will conclude on April 16.

The Finance & Leasing Association (FLA), which represents the credit industry, said that EROs were a good idea but it raised concerns that some debts, if included in the scheme, could hamper their members’ businesses. For example, it would want to ensure that motor finance companies were not inappropriately restricted from reclaiming their asset if borrowers fell behind with payments.

Some experts predict that EROs could have devastating effect on the payment protection insurance (PPI) market. PPI insurance, sold alongside personal loans and credit cards by banks and lenders, covers policyholders’ payments if they have an accident, fall ill or lose their job.