Martin Lewis has accused town halls of acting like "loan sharks" if households miss council tax payments.
Some residents find themselves owing more than 10 times their original debt just three weeks after missing a payment, research found.
The Money Saving Expert founder said the "aggressive" and "grotesque" tax collection practices employed by some local authorities accelerate people's distress.
The Money and Mental Health Policy Institute, a charity founded by Mr Lewis, revealed that millions of people in the UK could have fallen into a council tax "trap".
"Council tax collection practices are so aggressive they'd make the banks blush," Mr Lewis said.
"The grotesque process couldn't have been designed better to accelerate distress for people in council tax debt, especially those with mental health problems.
"When someone misses a monthly payment, rather than asking: 'How can we help?', many councils say: 'Now you have to pay 12 times that' - it's like a caricature of the worst loan sharks."
The research, funded by charity abrdn Financial Fairness Trust, indicated that around two million people with mental health problems in the UK may have fallen into a council tax "trap" - missing one payment and then potentially facing rapidly escalating debt collection, fees and charges.
Money and Mental Health found that within three weeks of missing just one council tax payment, people could find themselves being hit with a final notice from a local authority requiring them to pay a full annual council tax bill within seven days.
For an average UK household, this could mean a missed £140 bill resulted in the household facing a £1,600 just three weeks later, the charity said.
In London, most boroughs will email or telephone residents when a payment is overdue and if the balance is not paid a letter will be sent to the address within a week.
Just two paper reminders are sent out in the financial year and if the residents fail to pay on a third reminder, the right to pay by instalments is removed and the whole year’s charge will become due immediately in a system called a the "final notice stage".
People who fail to pay their full annual bills could also be hit with a liability order, which lets councils step up debt collection.
This includes potentially sending in bailiffs with arrears passed onto debt collectors just six weeks after the first missed payment in some UK cases, the charity said.
The analysis indicated that people with mental health issues are more than twice as likely to be in council tax debt.
It highlighted the case of a 55-year-old woman who has borderline personality and bipolar disorder and described receiving a letter on December 24.
It had arrived late because of postal delays and demanded that she pay her council tax bill by Christmas Day.
"I was in meltdown," she told researchers.
"I ended up taking out more credit and took out a credit card with 40 per cent interest just to be able to pay it off.
"I was a mess, I couldn't do anything. I'd already bought Christmas presents for the grandkids, but I couldn't spend any time with other family because I was so stressed."
The charity is campaigning for central Government to end the "council tax trap" and make collections fairer and more consistent.
It wants the Government to change regulations which dictate how quickly local authorities chase missed payments.
Council tax debt collection should be brought in line with consumer creditors, who often wait three to six months before demanding full repayment of an overdue debt, the charity said.
Some councils are already taking steps by focusing on providing more support to people in arrears, including setting up resident support funds for those struggling and bill reduction schemes.
Mr Lewis added: "Rapidly piling on payment demands, court threats, charges and bailiff action isn't a fair or productive way to respond to someone missing a payment, either through limited funds, or personal life crisis.
"It's like councils are setting a trap for people who miss a payment that they have no hope of escaping from, and that needs to stop.
"Councils will recover just as much money, and keep their constituents financially and mentally healthier, by working with those who are struggling, signposting them to help, and working on repayment plans.
"Of course, councils have faced major budget cuts, and some are struggling to survive - a policy challenge the new Government must address.
"Yet plugging budget gaps by ramping up punitive action on people in debt, a significant majority of whom have mental health problems, won't fix that. That's why we also need central Government to change the rules and stop allowing councils to behave in a way no commercial lender would ever be allowed to."
Mubin Haq, chief executive of abrdn Financial Fairness Trust, added: "The safeguards we have in place for mainstream lenders needs to be mirrored in the collection of council tax debt."
A spokesperson for the Local Government Association (LGA), which represents 350 councils across England, said: "Councils strive to ensure they have fair council tax collection policies and should always try to work with people who are struggling to meet their council tax bills.
"We agree that bailiffs should only ever be used as a last resort and anyone having trouble paying their council bills should get in touch with their local authority for financial help and advice.
"Councils do have a duty to their residents to collect taxes so important services are not affected but realise that times are still tough for many low-income households.
"Record numbers are claiming a discount on their council tax, which is adding further pressure on this already underfunded vital local safety net.
"Without enough funding to provide council tax support to those who need it, it is almost inevitable that bills will continue to be forced up for those who can least afford to pay."
A Ministry of Housing, Communities & Local Government (MHCLG) spokesperson said: "While the collection and enforcement of council tax is the responsibility of councils, we expect local authorities to be proportionate and sympathetic to those in genuine hardship when determining the most appropriate action to collect unpaid tax."
