Even Without a Recession, Financial Distress Among Businesses Is Rising
Although the U.S. economy closed out 2025 without a formal recession, a growing number of businesses have been finding themselves in financial distress. For many companies, the pressure has been building quietly for years and the cumulative effect is now palpable.
Companies are increasingly filing for Chapter 11 bankruptcy relief not because of an economy-wide downturn but rather due to mounting pressures on their balance sheets and cash flows that are coming to a head at the same time. From the start of 2025 through November, more than 700 companies in the U.S. petitioned for bankruptcy — the highest level of corporate filings since 2010.
The higher-for-longer interest-rate environment is the most significant driver of this predicament. Many companies borrowed heavily during the near-zero-rate era of 2020–2021. Since then, debt service costs have doubled or even tripled in some cases, consuming cash that would otherwise support operations, capital investment or strategic initiatives. Even businesses that remain profitable on paper may be experiencing liquidity strain as interest expense eats into their flexibility.
At the same time, access to capital has tightened. Banks and private credit lenders are more selective, more conservative and more expensive. Strong borrowers can still find financing, but the terms are tougher and the diligence deeper. In challenged sectors — such as commercial real estate, retail, logistics and certain manufacturing segments — refinancing options are limited and often punitive.
Margins are also under pressure. Input costs remain elevated due to lingering supply-chain inefficiencies while labor costs continue to rise. Customers are increasingly resistant to price increases, especially in long-term B2B contracts. The result is a squeeze from both sides: higher costs and flat or declining revenue. Even modest margin compression can push a leveraged company into liquidity shortfalls.
Lastly, many businesses are dealing with the unwinding of pandemic-era distortions. Stimulus funds, cheap debt and temporary demand spikes allowed companies to postpone difficult decisions. Now, those buffers are gone. Some firms expanded for demand that never became permanent. Others are carrying legacy liabilities that are coming due at the worst possible time. Fixed costs — from oversized real estate footprints to long-term vendor contracts — are proving misaligned in today’s environment.
More companies are beginning to view Chapter 11 as a strategic mechanism for resetting their capital structure and positioning themselves for long-term viability. When liquidity tightens, refinancing options narrow and fixed costs become misaligned with current revenue, Chapter 11 can offer tools that aren’t available out of court — from rejecting burdensome leases and contracts to restructuring secured debt and resolving legacy liabilities in an orderly way. A well-structured reorganization plan can preserve enterprise value, stabilize operations and create a platform for renewed growth.
The Law Offices of Michael Jay Berger in Beverly Hills is one of Southern California’s most experienced Chapter 11 bankruptcy law firms, with 12 locations across the region. If your business is facing overwhelming debt, please call us at 310-271-6223 or contact us online to schedule a consultation.
