A thought on this problem came to mind --
Since avatars do not detect collision with each other, how about giving them something to collide with?
It would seem to me that it could be possible to have each avatar (and the viewpoint) surrounded with invisible rectangular prisms (or octagonal for a more "round" fit) that follow them wherever they go.
If avatar A gets to close to avatar B, then avatar A will be stopped by the prism surrounding avatar B.
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