The Cabinet has given approval to Minister for Justice Frances Fitzgerald to refer a proposal to cut the bankruptcy term from three years to one to an Oireachtas committee.

The move had been championed by Labour Longford-Westmeath TD Willie Penrose, and was backed by the Labour parliamentary party.

However, it was opposed by the Department of Finance and will now not feature in the Government's mortgage arrears package to be announced later this week.

It will instead be examined by the Oireachtas Finance Committee, which will report back to Government on its conclusions before the summer recess.

If the Finance Committee, chaired by Liam Twomey, agrees to reduce the length of the bankruptcy period, legislation would be introduced early in the autumn.

If adopted, it would bring Irish bankruptcy law into line with those in the UK.

The Department of Finance has argued the reduction would make little difference on the basis that 70 per cent of mortgage bankruptcies ended in repossessions.

Sources said last night the Committee’s terms of reference would include an examination of the 70 per cent repossession rate to determine if it stood up to scrutiny.

If the Committee were to recommend a reduction to one year, the sources said, the law would be changed during the Coalition’s term of office.