A bill to close a potential legal loophole and prevent fraudulent debts from being written off was introduced to Parliament today by Commerce Minister Simon Power.

The Insolvency Amendment Bill - a small but significant amendment to the Insolvency Act 2006 - will ensure the integrity of the No Asset Procedure is maintained by preventing people from discharging debts that were acquired fraudulently.

"The No Asset Procedure is an alternative to bankruptcy, and essentially writes off debts of up to $40,000 for people who are in financial difficulty," Mr Power said.

"It was put in place to help people who find themselves in financial distress and have no realisable assets to pay off those debts. It was not meant to write off debts that have been obtained fraudulently.

"Stringent criteria have to be met to enter the No Asset Procedure, including having no assets that will help pay debts. Entry is meant to provide a fresh start for such people and help them become contributing members of the community again without the stigma of bankruptcy.

"The Insolvency Act allows fraudulent debts to be written off, but this was never the intention of the No Asset Procedure. It is also inconsistent with the overriding policy objective of insolvency law, which is designed to grant financially distressed individuals relief from contractual debts, not to reward dishonesty," Mr Power said.

The Insolvency Amendment Bill also amends the public register to record the names of those who have had debts discharged under the No Asset Procedure for an appropriate period of time. A permanent public record will also be kept of those who have been involved in multiple insolvency activity.

The bill will also restore the Official Assignee's ability to recover gifts made prior to bankruptcy to avoid payments to creditors, and extend the period available to the Official Assignee to decide whether or not to terminate a No Asset Procedure process.

"This amendment will make it easier for creditors to make better informed lending decisions, particularly in these tough economic times," Mr Power said.

"I am confident these changes will enhance the No Asset Procedure process and have an overall positive impact on the returns to creditors."

The sections of the bill relating to fraudulent debt have been designed to take effect retrospectively from the date of introduction of the bill.