Distress Makes a Comeback

A judge’s gavel rests on financial documents next to a calculator.

Business Bankruptcy Filings Expected to Continue to Rise Through Early 2026

Business bankruptcy filings, which began to rise in 2024 and 2025, are expected to continue to trend upwards, at least through the early part of this year.

Key takeaways:

Business bankruptcy filings increased by nearly 5% for the 12 months ending June 30, 2025, from the same period in 2024.
Total bankruptcy filings, including personal, rose nearly 12% in the same time span.
Filings in Manufacturing and Services industries made up the largest percentage of business filings.
Late 2025 interest rate cuts and potential changes to U.S. tariff policy may offer some relief to struggling companies and allow them to address core issues and return to health rather than filing for bankruptcy.

The outlook for 2026 suggests that business bankruptcy risk will remain concentrated in sectors sensitive to interest rates, consumer demand, and global trade dynamics. Retail, casual dining, real estate, energy, healthcare, higher education, and non-bank finance are among the most exposed.

Brian DaviesManaging Partner, Capstone Partners Financial Advisory Services

Middle market companies, typically defined as businesses with $10 million to $1 billion in annual revenues, are facing a crossroads as 2026 approaches. Amid persistent macroeconomic pressures, including interest rates, tariffs, and maturity of pandemic-era debt, many are grappling with liquidity constraints and strategic pivots. While dealmaking is on the rise, distress remains a core risk component, particularly in certain sectors.

While volatility and a degree of unpredictability stand to be a hallmark of 2026, here are some business bankruptcy trends that emerged in 2025 which can be expected to continue, at least through the early part of the year.

Insolvency Outlook based on a 10-Year Trend

After several years of decline, bankruptcy filings in the United States continued to climb in 2025, signaling mounting financial strain for households and businesses alike. For the 12-month period ending June 2025, total filings climbed to 542,529 cases, an 11.5% increase over the previous year, with business bankruptcy filings showing a 4.5% increase over the same period the prior year, according to data from the Administrative Office of the U.S. Courts.¹

Analysts point to a perfect storm of economic pressures that include persistent inflation and elevated interest rates through the third quarter as key drivers behind this trend. While filings remain well below the historic highs seen after the Great Recession, the uptick underscores growing vulnerability in consumer finances and hints at broader challenges for the economy in the months ahead.²

Looking back, the sharp decline in commercial filings beginning in 2020 is attributable, in large part, to government support programs designed to stabilize the economy reeling from the COVID-19 pandemic-era shutdowns. But as stimulus funds expired and high interest rates, inflation, and rising debt burdens took hold, filings began to rebound.

Between 2023 and the first half of 2025, an 11%–17% annual increase in business bankruptcies became the new normal. Commercial Chapter 11 filings rose nearly 20% year-over-year in both Q1 2024 and March 2025, with 2024 seeing a 20% rise over 2023. The number of public and private companies (with over U.S. $100 million in assets) filing also increased 44% by mid-2025, and total corporate bankruptcies hit a 14-year peak in 2024, with 694 filings.

Since the Administrative Office of the U.S. Courts annual reporting is delivered on June 30 of each year, the official results for the second half of 2025 will not be available until July 2026. However, the expectation based on the trends is that the upward trajectory will continue at least through the first half of 2026, although this may be fueled by 2025 calendar year filings. Two consecutive interest rate cuts late in 2025, as well as potential revisions to the U.S. tariff policy, may not be enough to reverse damage to struggling businesses, but it may provide some positive relief for those that are hanging in the balance.^{3, 4}

Trends by Industry

While pockets of stability and growth exist, most major industry groups within the U.S. economy experienced some level of distress in 2025. A significant volume was centered in businesses in manufacturing and services industry sectors—which are likely to not only experience the direct effects of macroeconomic issues such as supply chain volatility, labor shortages, and commodity pricing, but also the impact of declining confidence on consumer spending.

Even if 2026 trends resemble a plateau instead of a peak, bankruptcy activity is projected to remain elevated in 2026 from historic lows, and some industries will continue to bear the brunt of the risk.

Consumer discretionary sectors, particularly retail and casual dining, are among the most vulnerable. Casual dining chains, already burdened by high labor and food costs, face additional pressure from declining foot traffic and elevated debt loads. The combination of shrinking discretionary income and competitive pricing dynamics makes this sector a prime candidate for restructuring, as highlighted in Capstone Partner’s June 2025 Restaurants Sector Report.

Real estate, both commercial and residential, is another area of concern. The FDIC has flagged commercial real estate lending as a key risk for 2025–2026, citing loan maturities and refinancing challenges in an environment of higher yields. Office properties remain underutilized due to hybrid work trends, while retail spaces struggle with declining occupancy. Residential construction and housebuilders are also exposed as rising mortgage rates dampen demand and slow new projects.⁵

Energy and industrial sectors face their own set of challenges. Commodity price volatility and leveraged financing structures increase vulnerability, particularly for midstream energy operators and manufacturers dependent on global trade. Fitch’s outlook for Latin American midstream energy and European engineering and construction remains neutral for 2026, signaling limited recovery prospects.⁶

Healthcare and higher education are not immune to these pressures. Moody’s has flagged not-for-profit healthcare providers and U.S. higher education institutions as sectors facing persistent financial strain. Rising labor costs, regulatory compliance expenses, and declining enrollment rates contribute to mounting operational challenges.⁷ These organizations often operate with thin margins and limited flexibility, making them susceptible to liquidity shocks.

The Financial sector, particularly non-bank lenders and private credit funds, is another area to watch. Moody’s warns that low transparency and high leverage in private credit markets pose systemic risks.⁸ As liquidity tightens and defaults rise, entities invested in sectors with high levels of distress could face increased challenges of their own.

In summary, the outlook for 2026 suggests that bankruptcy risk will remain concentrated in sectors sensitive to interest rates, consumer demand, and global trade dynamics. Retail, casual dining, real estate, energy, healthcare, higher education, and non-bank finance are among the most exposed.

Strategic Planning for 2026

Regardless of company size, ownership structure, or industry, all businesses should engage in an annual strategic planning process which includes a comprehensive evaluation of near- and long-term risks and overall organizational health.

Some of the main areas Capstone recommends evaluating include:

Company performance. This includes, but is not limited to, financial performance, strengths of core processes, culture, and technical expertise. The understanding of the company’s strengths and weaknesses will allow management to align resources to maximize delivery to customers and strengthen competitive advantages in the market.
Market opportunity. Analyzing the market addresses the question of how the industry’s customer base is changing, and whether the current plan is well matched to the most important priorities of the high-growth and or high-profit segments. Additionally, this process should evaluate the go-to-market approach to ensure it is aligned with internal resources, products, and support.
Competitive landscape. Strategically addressing a company’s competition involves more than just acknowledging rivals—it’s about using competitive insights to shape the positioning, messaging, and long-term strategy. A company’s competitive advantages must be compelling enough to overcome those of its competitors. Even when a company sells products that are commoditized, it can have competitive advantages.

Business owners and operators who routinely review key performance indicators (KPIs), benchmark performance against industry competitors, and have a foundational awareness of their operational, administrative, and financial functions are more likely to recognize signs of stress in the business, when early intervention can have a significant impact on the company’s performance and outlook. The earlier issues are identified and addressed, the more options a business will have.

Interventions for Distressed Companies

Depending on the level of distress, along with other internal and external factors, a struggling business may have several different approaches available besides filing for bankruptcy.

Proactive Performance Improvement Projects

Companies may benefit from the assistance of a business performance improvement team to help identify inefficiencies and opportunities for development. If this is started early enough, this process may help a business avoid the need for more aggressive interventions in the future. This process can also benefit healthy companies and lead to the discovery of new opportunities for growth.

Distressed M&A and Divestitures

With a significant amount of private equity dry powder available, 2026 is expected to be an aggressive year for middle market M&A—especially carve outs and strategic asset sales. Distressed middle-market businesses may attract opportunistic buyers seeking operational upside. Divestiture paths can be more advantageous than full bankruptcy.

Out-of-Court Restructuring

For many businesses in significant distress, an out-of-court process may still be a viable alternative to bankruptcy. In general, out-of-court restructuring processes can be accomplished with less expense and in a shorter amount of time than bankruptcy while delivering positive outcomes for stakeholders.

Bankruptcy

If an out-of-court solution is not available or desired for some reason, an experienced financial advisor can provide support through bankruptcy. Depending on the circumstances, different stakeholders—including creditors, debtors, and trustees—may engage advisory professionals to assist them and advocate for their interests during the process.

Capstone’s Financial Advisory Services group provides a range of services, across the full business lifecycle, designed to help businesses owners, investors, and stakeholders address the root causes of distress. Our teams have helped struggling organizations create a path back to profitability and have helped healthy companies design and implement long-term strategic plans for growth.

While the economic environment may be volatile for some time to come, our professionals have experienced downturns before and have the experience and tools to help clients navigate challenging situations and find solutions for their most pressing business issues. Contact us if you have questions or if you would like to speak to a member of our team about your specific concerns.