Snowed under with debts from a failed business, Renata’s hands shook as she told a tale of financial misery that drove her to contemplate suicide and visited fear on her ageing parents.

“I was so scared of the debt collectors because they were coming to my parents’ house,” she said, depicting a nightmare scenario as hungry creditors closed in. “If you are a debtor here, the state criminalises you, worse than if you’re a real criminal. Even a murderer can be released early with good behaviour. I didn’t kill anyone or hurt anyone, I didn’t want my business to collapse – but I will not be free until the end of my life.”

Renata’s harrowing experience mirrors a mounting personal debt crisis in the Czech Republic that is undermining one of Europe’s most flourishing economies by driving workers into the shadow economy to evade aggressive debt collectors.

Now Czech MPs are under pressure to enact emergency legislation that could provide an escape route for the country’s vast army of debtors. They will vote on a radical new bankruptcy law this month after the Czech senate rejected an earlier proposal as too weak to tackle a crisis that critics say has left a trail of blighted lives and broken marriages.

Renata, 54, is typical. Withholding her last name to shield her family and her five-year-old daughter, she described losing her home and possessions and enduring marital separation after the small building company she ran with her husband in a village near Prague went bust following the 2008 global financial crash, saddling her with bills she could not pay and allowing debt agencies to seize her property.

“It has completely ruined my life,” she said, sitting in a cafe in the industrial city of Kladno, 18 miles north-west of Prague. “It’s hopeless. There is no light at the end of the tunnel. I’d like to repay some of the debt, but I’ve no money or property. And I need to care for my daughter.”

Renata owes around 7m Czech koruna (£245,000) according to 34 separate debt recovery notices tabled by different private bailiff companies, some of which have repeatedly harassed her parents for money. Compounding her problems is what experts say is one of Europe’s most stringent insolvency laws, restricting bankruptcy to those able to prove they can pay 30% of their debts – impossible on her meagre income as a part-time bookkeeper. It is this law that MPs are being urged to reform.

Renata is just one of 863,000 Czechs – out of a population of 10.6 million – facing paralysing demands after debt collectors ordered their bank accounts frozen and their incomes slashed on behalf of creditors determined to pursue outstanding dues regardless of ability to pay. Some 150,000 people have 10 or more outstanding debts for amounts they can never hope to pay. Many face inflated fines for not having valid tickets on public transport, often when they were children. Around 6,000 Czechs face debts from fines incurred when they were minors, mostly for being caught on trams or metro trains without tickets.

Even a murderer can be released early with good behaviour. I didn’t kill anyone or hurt anyone but I will not be free until the end of my life Renata, ex-business owner

Critics say lives are being scarred by a punitive debt-collecting system that has no parallel in western Europe – with local transport authorities and public utilities selling small unpaid debts to private collecting agencies at a huge mark-up. That often leads to modest sums being multiplied to thousands of pounds once late-payment sanctions and fees for lawyers and bailiffs are added. Some debtors borrow money to pay off the demands and fall into secondary debt.

“My girlfriend and I were each fined 800 koruna (£28) when we were caught on the tram without a ticket in 2006,” said Sam Kahakzad, 32, a television producer from Prague. “We had no money, so couldn’t pay on the spot. We didn’t hear anything else until 2011, when we got letters demanding 28,000 koruna (£977) and warning we would be fined 10,000 koruna (£349) if we didn’t pay within a month. I had to make two emergency payments from my salary.”

In one instance, a debt officially quoted at 3.5p for the electricity company Bohemia Energy soared to more than £733 after costs.

The inflating of unpaid accounts with fees and penalties became commonplace after a 2001 reform ushering in a system of private bailiffs, who collected debts that had proliferated during a credit boom after the downfall of the communist regime in the former Czechoslovakia in 1989.

Debt recovery rates duly increased. But anti-debt campaigners point to abuses exacerbated by competition among the 150 private bailiffs – some of whom are notorious for entering homes and seizing property, including children’s toys – and their close relationship with politicians, who have turned a blind eye to excesses.

They warn that rising indebtedness is feeding inequality and social exclusion that threatens the country’s democratic gains after the fall of communism and joining the EU. “Experience with indebtedness and collection is associated with lower trust in institutions, lower trust in democracy,” said Daniel Prokop, a sociologist at Prague Charles University. “These people may not be authoritarian in the sense of supporting Vladimir Putin, but they say for people like them it doesn’t matter whether there is democracy. It is the people around them who are driven to extreme parties.”

Jan Čulík, Czech studies specialist at Glasgow University, called the issue “one of the main factors destabilising the country”. He said: “No wonder people distrust the democratic regime and vote for populists and the new oligarchs. Would you vote for ‘democratic establishment’ politicians who condemned you to perpetual debt slavery? Under communism, nothing like this ever happened.”

Meanwhile, debtors have become convenient scapegoats amid the rising populist mood. The Czech president, Miloš Zeman, who was prime minister when the current debt recovery law was passed, has repeatedly blamed them for their own predicament.

Radek Hábl, a debt relief campaigner, compiled an interactive map showing that areas with the highest personal debt levels also displayed the greatest voter support for populist parties, and for Zeman, who was re-elected in last January’s presidential election. “It’s interesting because Zeman says he hates debtors,” said Hábl.