785 Corporate Bankruptcies Signal ‘Find Out’ Phase
The year 2025 concluded with an unprecedented surge in large corporate bankruptcies, reaching the highest number recorded outside of an official recession. Standard & Poor’s tracked a total of 785 bankruptcy filings from what it classifies as significant businesses. Adding to this stark figure, analytics firm Cornerstone Research noted that 32 of these filings were so-called ‘mega bankruptcies,’ involving firms with over $1 billion in reported assets.
This alarming trend extends beyond major corporations, with regular businesses and personal bankruptcies also showing significant increases over 2024, a year that itself was challenging. While economic sentiment may currently be buoyant, the rising tide of corporate failures, particularly among recognizable names like Nikola Motors, Forever 21, and the pharmacy chain Rite Aid (which filed for bankruptcy for the second time in 2025, just eight months after exiting its first), suggests deeper systemic issues at play.
The spike in high-profile business closures in 2025, though dramatic, has been a growing concern for some time. While factors like tariffs may have been cited as convenient excuses, the underlying problems have been accumulating. The spectacle of these failures, often attributed to corporate greed or mismanagement, ultimately impacts everyday people and is concentrated in sectors that might seem counterintuitive.
The Paradoxical Economic Landscape
The sheer volume of corporate bankruptcies typically signals broader economic distress. However, this surge occurs amidst claims of robust consumer demand and relatively reasonable historical interest rates. This apparent contradiction—high bankruptcies alongside claims of economic strength—warrants a closer examination of the driving forces.
Further complicating the narrative are the industries most affected, as identified by a PwC report: real estate, healthcare, and energy. These sectors are often considered recession-proof (healthcare) or are experiencing unprecedented demand (energy, driven by AI data centers), and real estate has remained near historic highs. This disconnect suggests that conventional macroeconomic explanations may not fully capture the situation.
The Bankruptcy System as a Financial Tool
One of the primary drivers of the bankruptcy boom appears to be the increasing use of the bankruptcy process itself as a strategic financial and legal tool. While the specifics of bankruptcy law are complex, for large corporations, Chapter 11 and Chapter 7 filings are most relevant.
- Chapter 7 Bankruptcy: This is the more traditional form where a business or individual liquidates all assets to pay creditors. For businesses, this typically means cessation of operations, layoffs, and investors losing their stake. It represents a complete financial reset.
- Chapter 11 Bankruptcy: This allows a company to reorganize its debts and operations while under court protection. The company’s management typically remains in control, but creditors must wait in line, providing a crucial breathing room. This process often aims to preserve the business’s value—its brand, contracts, and workforce—as a going concern, or to facilitate a sale of its assets free and clear of debt.
Chapter 11 has become particularly attractive due to mechanisms like the Section 363 sale. This process allows a company in bankruptcy to sell its assets quickly, often to a pre-selected buyer (the ‘stalking horse bidder’), free from most liens and encumbrances. This accelerated sale process, while intended to maximize recovery for creditors, offers significant advantages to acquirers, particularly private equity firms.
The Role of Private Equity and ‘363 Sales’
Section 363 sales are attractive to private equity because they enable rapid acquisitions with significantly reduced due diligence requirements. The sale is typically expedited, and the assets are transferred ‘free and clear,’ minimizing the risk of inheriting unforeseen liabilities. This expedited nature also often results in less scrutiny from regulatory bodies like the Federal Trade Commission (FTC), which may be hesitant to block a sale that prevents immediate liquidation and job losses, or where the market impact is less clear due to the speed of the transaction.
A concerning cyclical aspect emerges: private equity firms often load acquired companies with additional debt, increasing the likelihood of future financial distress and subsequent bankruptcies. This strategy has led to a phenomenon where large companies can file for bankruptcy multiple times. Bloomberg reported that in 2023 and 2024, 60 large companies filed for bankruptcy at least twice. Party City, for instance, was sold off with over $1 billion in debt and filed for bankruptcy again just 14 months later.
Entering the ‘Find Out’ Stage of the Business Cycle
The second major factor contributing to the bankruptcy surge is the entry into what can be described as the ‘find out’ stage of the business cycle. After nearly two decades of historically low interest rates and readily available cheap money, many businesses have become accustomed to operating with significant leverage. What was once considered risky borrowing has become a normalized strategy, often encouraged by the private equity model.
As interest rates have risen, these highly leveraged companies, including many ‘zombie companies’ that were kept afloat by low rates and government support, are now facing the consequences. The current bankruptcy boom can be seen as a delayed reckoning, an overdue correction for businesses that overextended themselves during the era of cheap credit.
Furthermore, this trend is exacerbated by an increase in ‘out-of-court’ settlements. Companies may bypass the official bankruptcy process by directly negotiating with creditors, often trading debt for equity. These arrangements are harder to track, as they are intentionally kept out of public court records, but Cornerstone Research indicates they have also reached record highs, suggesting the true extent of financial distress may be even greater than official bankruptcy figures suggest.
Market Impact and What Investors Should Know
The implications for investors and the broader economy are significant:
- Distorted Market Metrics: The repeated use of bankruptcy and out-of-court restructurings can skew economic data, making it harder to gauge true market health.
- Consolidation and Reduced Competition: The favored method of acquiring distressed assets, especially through 363 sales, can lead to market consolidation. For instance, Rite Aid’s bankruptcy and asset sale to CVS and Walgreens reduced competition in the pharmacy sector in many areas. This consolidation can lead to higher prices and fewer choices for consumers.
- Impact on Employment and Operations: While Chapter 11 and 363 sales aim to preserve operations and jobs, the subsequent focus on cost-cutting by acquiring entities often leads to store closures, layoffs, and a reduction in services, even in seemingly resilient sectors like healthcare.
- Shifting Consumer Spending: The current economic environment is bifurcating consumer demand. A segment of highly price-sensitive shoppers is focused on value, while another affluent segment is willing to pay premium prices for exclusivity. Businesses operating in the middle ground are struggling the most, impacting the availability of everyday jobs.
- Increased Risk for Leveraged Companies: Companies that have relied heavily on debt financing, especially those emerging from the low-interest-rate era, face heightened risk as interest rates remain elevated. Investors should be wary of highly leveraged balance sheets.
In conclusion, the record number of corporate bankruptcies in 2025 is not merely a symptom of isolated corporate failures or a simple indicator of recession. It reflects a complex interplay of strategic financial engineering, the legacy of prolonged cheap money, and a fundamental shift in the business cycle, pushing many companies into a ‘find out’ phase where their long-term viability is being tested.
Source: Are Companies Entering The "Find Out" Stage Of The Business Cycle? (YouTube)
