While the government works overtime to sort out the mess the developers made during the boom and get its own house in order, a personal-debt time bomb is ticking away.

Buoyed by easy access to credit and the equity bonus of increasing property prices, we managed to dig ourselves into a seriously deep hole over the past few years. Ireland's personal debt ratio has jumped massively – we now have the dubious honour of having the fourth highest household debt (including mortgage debt) to disposable income ratio in the world, at 176%. To put that into context, we are now ahead of the British (at 175%) and the Americans (138%), both countries which would have been considered much more inclined towards high borrowing. Private-sector credit in Ireland now stands at €395bn – far in excess of the developer debts going into Nama – and represents a potentially massive headache for the government going forward.

The problem is further exacerbated by the fact that people on the verge of bankruptcy have very few formal options in Ireland. Informal arrangements are often entered into where creditors see no value in pursuing the debtor for the full amount – often brought about with the help of the Money Advice and Budgeting Service (Mabs) – but the cost of going to court to make that official is prohibitive.

Additionally, bankruptcy is so punishing here that it's only an option in the most extreme of cases and, indeed, is rare, with just a handful of bankruptcies annually. It is very costly – you could end up adding €30,000 to your debts – and creditors can pursue you for payment for up to 12 years, during which time you have very severely limited access to credit.

Indeed, bankruptcy is so punitive here that there's a real chance that we will soon start seeing bankruptcy tourism – where wealthy people relocate to jurisdictions with more reasonable debt-resolution systems. The indications are that some individuals are already preparing for this eventuality, says Stephen Tennant, director of recovery and re-organisation with insolvency practitioners Grant Thornton.

"Bankruptcy tourism is more suited to your high-level debtors and there have been one or two cases in the press. In essence, it means that someone will change their jurisdiction and they will need to prove that they are continuing their business there. It is hard to tell how often it will be done – a lot will depend on the lenders and how hard they are going to go on the personal guarantees. If they are going hard then we may see it kick in. I think we have people who are lining up the ducks, making sure that they are ready to do it but waiting to see what the attitudes are to the personal guarantees," he said.

A more flexible and less punitive system is needed to prevent both those with huge debts absconding elsewhere and those with smaller, personal debts going into financial meltdown. In fairness to the government, it is aware that current bankruptcy legislation is hopelessly outdated and its renewed programme includes a commitment to create a new system of personal insolvency regulations which would provide a statutory non-court-based debt-settlement system.

This also comes on foot of a report by the Law Reform Commission on personal debt which included such a system. The key principles underpinning the system should be that it is focused on "earned debt discharge"(so you pay off, at least, some of your debt over time); is open to honest and long-term insolvent debtors; is legally binding; preserves a reasonable standard of living for debtors and that they are free from their obligations within a period much shorter than the 12 years in the current legislation. The proposed system is necessary to replace the outdated system currently in place said Ciaran Phelan, chief executive of the Irish Brokers Association.

"With an estimated 10,000 people facing repossession, it's imperative that we have a more balanced system that doesn't simply rely on the threat of imprisonment to recover debt. If introduced, its efficiency and effectiveness would need to be given careful consideration in its implementation," he said.

Reform here is most likely to follow the route taken by the UK, where heavily indebted people can avoid bankruptcy by entering into an Individual Voluntary Arrangement (IVA) with their creditors.

An IVA is essentially a debtor's proposal to repay part of their debt presented to creditors. This is done through a licensed insolvency practitioner who will establish whether an IVA is the suitable option, negotiate a monthly payment with the debtor which does not impact on their reasonable living standard and then present that proposal to creditors. If agreement is secured, the insolvency practitioner collects the monthly payment and distributes it, minus their share of 15%, to the creditors.

Open to people with debts of over £15,000 (€16,630), IVAs have a number of advantages which make them attractive to both debtors and creditors. For debtors, it is a much less expensive system; there is no stigma attached as there would be with bankruptcy which can be publicised; they are not restricted from obtaining credit; the effect on their credit rating is not as detrimental; the debts are frozen so no more interest accrues; and they retain control over their assets.

"People can see the end of the road. Most people who fall off do so in the first two years and over that you can probably see your way to the end. These things are pretty flexible and because interest is frozen most people can see a path out of this," said Mark Allen, who heads up Grant Thornton's IVA division.

For creditors, they will receive a higher payment than they could expect from a bankruptcy and IVAs have a 70% success rate so they can be relatively confident of payment. IVAs are becoming increasingly popular in the UK– Grant Thornton currently handles IVAs for 13,000 clients from its Belfast office taking in £4m monthly for redistribution to creditors.

A similar system should be relatively easy to implement in Ireland, said Karl Deeter of Irish Mortgage Brokers, because the legal contracts between borrowers and lenders are flexible enough to incorporate IVA style systems. "We have a better foundation but no house. What we need is meaningful engagement whereby there is a coordinated team with any credit provider who deal with all debt managers – Mabs and private providers," he said.