Raising the bankruptcy threshhold would benefit young people, according to Attorney-General Robert McClelland who said that during the past financial year 20 per cent of sequestraton orders - an application to the Federal Court to have someone declared bankrupt - were for debts between $2000 and $10,000.

"That leaves the record against the debtor forever and a day," McClelland told ABC Radio.

"In the case of young people, that can often prevent them from obtaining a loan for a car, let alone a house."

McClelland said that there had been an 11 per cent increase in bankruptcies last year.

"Quite often, people become bankrupt through no fault of their own as unforeseen circumstances hit them. We are also concerned that too many creditors are still using bankruptcy as a tool in debt collection as opposed to a last resort. So, the increase in the threshold from $2000 to $10,000 will be a disincentive for that to occur," he told a press conference in Hurstville.

The new legislation aimed to modernise insolvency arrangements by recognising that the majority of bankruptcies relate to consumer debts and involve people with relatively few assets and little income.

"Increasingly, bankruptcies tend to involve people who have simply fallen on hard times rather than unscrupulous debtors trying to avoid paying their debts," McClelland said.

Other changes suggested included increasing the time available for people to obtain advice and help when a petition is filed to declare them bankrupt from one week to four weeks.

The Government has said the new laws will give those in financial distress a more realistic opportunity to consider their options, reorganise affairs and, where possible, avoid bankruptcy. McClelland said evidence suggested that bankrupcty only recovers about 1.6 cents in the dollar, whereas debtor agreements recover about 76 cents - so bankrupcty should be a last resort.

"There should be other means to explore, such as debtor agreements, or, in the worst case scenario, garnisheeing wages or arranging for a sheriff to confiscate assets. But sending someone bankrupt has very significant consequences. Firstly, they stay bankrupt for a three year period and their credit record forever and a day is damaged," he said.

McClelland added that with the current system enabling creditors to use bankruptcy processes too easily, the resources of the courts are engaged at a substantial cost to taxpayers.

The draft bill will be open for public comment until 14 September.