New bankruptcy laws which will encourage enterprise while cracking down on irresponsible and reckless creditors came into force this month.

In the biggest shake-up of personal insolvency laws for a generation, the Enterprise Act 2002 marks the end of the one-size-fits-all approach to bankruptcy.

It will introduce a fairer regime for those who have failed through no fault of their own, backed up by tough new measures for the minority of bankrupts who take advantage of their creditors and the public.

The Act will:-

l provide for the automatic discharge of most bankrupts after a maximum of 12 months;

l introduce Bankruptcy Restriction Orders (BROs) to protect the public and business community from bankrupts whose conduct is reckless, culpable or irresponsible

l introduce Income Payments Agreements (IPA) - a new way of repaying debts to creditors from the bankrupt's income

l introduce fast track voluntary arrangements, enabling the bankruptcy order to be annulled in return for increased or speedier returns for creditors

l remove unnecessary restrictions on bankrupts

l limit to three years the period in which a trustee may deal with a bankrupt's home.

Consumer Minister Gerry Sutcliffe said: "Business is a dynamic process and difficulties and failure are an inevitable part of an enterprise economy.

"However, the fear and consequences of honest failure should not be so disproportionate that they act as a disincentive to entrepreneurs.

"If we are to build a truly enterprising economy we need an insolvency regime that supports, rather than stifles, the development and growth of new businesses and helps reduce the consequences of failure."

From April 1, 2004, a bankrupt will be automatically discharged from bankruptcy after one year rather than after two or three years as happens currently. A bankrupt may be discharged earlier than one year if the Official Receiver's investigation is concluded before then or is not needed.

However, the principle of 'can pay, will pay' still applies. A bankrupt will still:

l risk losing their home and possessions, which will be sold to pay outstanding debts

l face severe restrictions on their finances, such as getting a mortgage, bank account or future credit

l have their bankruptcy advertised and recorded on a public register that anyone can search

l make ongoing payments to creditors where possible

l face prosecution if they are found to be dishonest.

In most cases, bankrupts will have to make payments to creditors from their income for three years. Currently a court order is needed to arrange such payments, but under the new rules, a system of income payment agreements (IPAs) will make it much easier for bankrupts to make such payments. The Enterprise Act also introduces Bankruptcy Restriction Orders as a way of dealing with bankrupts who are dishonest, reckless or blameworthy.

BROs will cover a wide variety of conduct. They will last between two and 15 years and impose restrictions on obtaining credit of more than £500 without disclosing status, trading in a name/style other than the one in which the bankruptcy order was made and acting as a director. Breach of an order will be a criminal offence.

Mr Sutcliffe said: "Bankruptcy is not, and never will be an easy option."