As economic pressures mount—higher interest rates, tighter credit, rising labor and material costs—experts warn of a potential surge in corporate bankruptcies. Bankruptcy filings through the first quarter of 2025 are already trending upward (with business filings rising 14.7% from this time last year),[1] suggesting a return to pre-pandemic norms after years of artificial stability fueled by government support and cheap money.

The most recent data suggests that the increase in filings is getting worse. For instance, chapter 11 filings totaled 733 in May, an increase of 62% over the 453 filings in April, according to data provided by Epiq AACER.

The sharp rise in commercial Chapter 11 filings in 2025 highlights the sustained economic pressures confronting businesses, driven by high borrowing costs, looming tariff threats, and continued geopolitical instability.

For business leaders, this moment calls for vigilance and a clear-eyed understanding of how corporate bankruptcy actually works—what it can solve, what it can't, and how to avoid the most common missteps.

Chapter 11: A Reset, Not a Rescue

The most common form of corporate bankruptcy is Chapter 11, which allows a company to restructure its debts and continue operating under court supervision. The goal isn't liquidation—it's reorganization—however, not every Chapter 11 end in survival.

There are two paths under Chapter 11:

Traditional Chapter 11: Involves a lengthy and complex reorganization process, often for mid-sized to large companies.

Subchapter V (Small Business Reorganization Act): Designed for small businesses with debts below a certain threshold (currently $3,024,725, indexed annually), offering a faster, less expensive route.

Other types of bankruptcy include:

Chapter 7: Liquidation. The company ceases operations, and a trustee sells assets to pay creditors.

Chapter 15: Used for cross-border insolvency cases when a company is tied to foreign jurisdictions.

When Should a Company Consider Bankruptcy?

Bankruptcy may be appropriate when:

• Debt servicing becomes unsustainable, and creditors won't renegotiate.
• Cash flow is negative for multiple quarters, with no clear turnaround.
• Lawsuits or liabilities (like mass torts) threaten solvency.
• Vendors or lenders begin pulling back, and restructuring outside court has failed.

Bankruptcy is not a first resort—it's often a last tool when other workouts or refinancings aren't viable. But waiting too long can backfire. Companies that act early tend to preserve more value, retain more talent, and have a better shot at emerging successfully.

Misconceptions About Corporate Bankruptcy

"Bankruptcy means shutting down."

Not necessarily. Many companies continue operating during and after bankruptcy. Chapter 11 is designed to help them stay alive while restructuring.

"It's a private process."

In reality, bankruptcy is public and can affect customer, vendor, and investor confidence. Communication strategy during a filing is critical.

"Management is replaced."

Usually, existing management stays in place as a “debtor in possession.” However, a trustee may be appointed in cases of fraud or mismanagement.

"All debts are wiped clean."

Debts are renegotiated, not erased. Some may be discharged, others restructured. Priority creditors—like employees and secured lenders—often get paid first.

Key Steps in a Corporate Bankruptcy

1. Pre-filing Planning: Assess debt structure, explore refinancing, and develop a go-forward strategy. Engage restructuring advisors and counsel.
2. File Petition: This triggers the "automatic stay," pausing collection efforts, lawsuits, and foreclosures.
3. Debtor-in-Possession (DIP) Financing: Many companies secure new financing to operate during the bankruptcy process.
4. Creditor Negotiations: Businesses work with creditors and stakeholders to develop a reorganization plan.
5. Court Approval of the Plan: The court must approve the plan and confirm that it is fair and feasible.
6. Emergence or Liquidation: Depending on the plan's success, the company either emerges from bankruptcy or proceeds to liquidation.

Common Pitfalls to Avoid

• Waiting too long to act: Delaying bankruptcy can reduce options, scare off investors, and lead to more drastic outcomes like liquidation.
• Poor communication: Mishandling messaging with stakeholders (employees, customers, vendors) can accelerate business decline.
• Focusing only on debt, not operations: Successful reorganization isn't just financial—it's operational. Cutting costs without strategic reform often leads to a second bankruptcy.
• Ignoring post-bankruptcy capital needs: Emerging from Chapter 11 doesn't mean the funding spigot turns on. Companies must secure sustainable capital for the long haul.

Practical Guidance for Business Leaders

If you're leading a financially distressed company, consider these proactive steps:

• Engage early with advisors – Financial and legal restructuring experts can help navigate options before bankruptcy becomes unavoidable.
• Explore out-of-court workouts – Sometimes, private negotiations can resolve debt issues without filing.
• Develop multiple scenarios – Have a realistic business plan that includes best-, middle-, and worst-case paths.
• Consider your stakeholders – Employees, vendors, customers, and investors all have different priorities in a restructuring—transparency matters.

Final Thoughts

Corporate bankruptcy is not a failure—it's a legal and strategic process for dealing with financial distress. However, it only works when used intentionally and with a clear plan for what comes next. With more companies facing pressure in 2025 and beyond, understanding the tools—and the traps—of Chapter 11 may prove essential.

Wise leaders don't wait until bankruptcy is inevitable. They prepare early, stay honest about their company's position, and act decisively to protect long-term value.