Business groups believe proposed changes to insolvency laws will be a lifeline for thousands of small businesses struggling through the COVID-19 pandemic.

Treasurer Josh Frydenberg wants to give more control to small businesses facing financial hardship to protect them from being wound up.

Drawing on key features of bankruptcy laws used in the United States, the treasurer wants to introduce more flexible insolvency laws, particularly in the face of the coronavirus pandemic.

“Many businesses who are doing it tough through the COVID crisis because of health restrictions – they have had to close their doors but the liabilities have kept building up,” Mr Frydbenberg said on Thursday.

“The focus is to give those business owners more control as they deal with these liabilities.”

He wants businesses to work with an insolvency practitioner to come up with a plan to repay accumulating debts over time, rather than handing over the keys to an administrator and seeing their assets chewed up.

“This will apply to those businesses with liabilities of less than $1 million, that’s about 76 per cent of small businesses who are currently going through the insolvency process,” Mr Frydenberg said.

Business Council of Australia chief executive Jennifer Westacott said the changes would give thousands of businesses a chance to keep their doors open.

“For thousands of small business people, this will be a lifeline,” she said.

Australian Chamber of Commerce and Industry chief economist Ross Lambie welcomed the announcement.

“For many of the 900,000 small businesses that are currently accessing support, insolvency is going to feature in their futures,” he said.

The Law Council expressed concern about the lack of consultation to date given the very tight time frames within which the government appears to want to act.

“It is imperative that prior to introduction of the new regime, the government take into account comments from the legal profession and insolvency practitioners on the new proposals,” it said.

Shadow treasurer Jim Chalmers said Labor would take its time to go through the detail of the complex arrangements.

“We will do what the government doesn’t appear to have done, which is to consult with key stakeholders and consult with the industry,” he said.

The planned changes follow the extension of temporary insolvency protections to support small businesses impacted by COVID-19.

As the temporary relief expires at the end of December, the number of companies being put into external administration is expected to increase.

The longer-term reforms are earmarked to start on January 1, subject to federal parliament passing legislation.

Key elements of the changes include:

* The introduction of a new debt restructuring process for incorporated businesses with liabilities of less than $1 million;

* Moving from a one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model, allowing eligible small businesses to restructure existing debts while remaining in control of their business;

* A period of 20 business days to develop a restructuring plan by a small business restructuring practitioner, followed by 15 business days for creditors to vote on the plan;

* A simplified liquidation pathway for small businesses;

* And red tape cuts for the insolvency sector.