Are Companies Entering The "Find Out" Stage Of The Business Cycle?

0:00 2025 just finished off the year with the highest number

0:02 of large corporate bankruptcies ever outside of an official recession.

0:06 Standard and pores tracked 785 total bankruptcy

0:09 filings from what they classified as significant businesses.

0:13 A similar data set from the analytics firm Cornerstone Research noted that 32

0:17 of these filings were what they

0:19 had previously hyperbolically dubbed mega bankruptcies,

0:22 which just meant the firms going under had

0:24 more than a billion dollars in reported assets.

0:27 But that doesn't sound as cool.

0:28 The trend is clear outside of these large companies as well

0:31 with regular businesses and personal bankruptcies up significantly over 2024,

0:36 which itself wasn't a great year either.

0:38 Now, with all of the uh excitement in the economy right now,

0:42 maybe this isn't exactly shocking to you,

0:44 especially since most of the bigname failures pretty clearly had it coming.

0:48 Nickelo motors, Forever 21, and Hooters, as well as the pharmacy Raid,

0:52 which actually went bankrupt for a second time in 2025,

0:56 just eight months after exiting its first bankruptcy.

0:59 Now, that alone should give you a hint that there

1:01 is a little bit more behind the bankruptcy boom.

1:03 The trend of high-profile businesses closing

1:05 their doors on paper certainly spiked last year,

1:08 but it has been growing for a long time before

1:10 problems like tariffs provided these businesses with a convenient excuse.

1:14 So, while it might be fun to point and laugh at the spectacular failures

1:17 of these high-profile companies that have clearly

1:19 been incredibly greedy and or run terribly,

1:22 the brunt of this problem is, as always,

1:24 impacting regular people and taking place in an industry you might notice.

1:28 All for reasons you might not expect.

1:31 Hooters of America filing for bankruptcy.

1:34 That move coming to enable a founder buyout of a casual dining chain.

1:39 Nicola Motors, headquartered in Coolage, filed for bankruptcy.

1:42 I am 22 years old and I am in $91,300

1:45 worth of debt and I am filing Chapter 7 bankruptcy today.

1:48 I filed for bankruptcy when I was 20 years old.

1:50 I filed for bankruptcy.

1:52 I declare bankruptcy.

1:55 [screaming]

1:58 Okay, so a record number of high-profile businesses going bankrupt is

2:02 generally not a great indication of the health of the overall economy.

2:05 And there are three factors really driving this surge.

2:09 But before we blame everything exclusively on macro factors,

2:12 we need to acknowledge some logical ironies.

2:15 We are being told that these bankruptcies are

2:17 the result of declining consumer demand and higher interest rates.

2:20 But at the same time,

2:21 we are also being told that consumer demand is up significantly

2:24 and interest rates may be high compared to 5 years ago.

2:26 But by historical standards, they are still very reasonable.

2:30 The industries where these bankruptcies are happening

2:32 is also important because without some important details,

2:36 it doesn't really make a lot of sense.

2:38 A report by PWC found that amongst

2:40 the most affected industries were real estate, healthcare, and energy.

2:44 We are told that healthcare is supposed to be recession proof.

2:47 Real estate is hovering around all-time highs and energy has

2:50 literally never had more demand thanks to AI data centers.

2:53 So with these contradictory ideas in mind,

2:55 the first reason for the bankruptcy boom has a lot more to do

2:58 with the bankruptcy becoming an increasingly

3:00 convenient tool up the arsenal of financeers.

3:03 Now, I am not a bankruptcy attorney,

3:05 and while we did consult one for writing this video,

3:07 if you were planning to take

3:08 your own billion-dollar company through the process,

3:10 you might want to hire your own legal team.

3:12 But in general, there are nine different types of bankruptcy.

3:16 Rather confusingly, these are chapters 1 through 15.

3:20 Some of these are for really specific cases, like chapter 12,

3:24 which is for the reorganization of family farms and fisheries,

3:27 or chapter 9, which is only for municipalities.

3:30 However, for most of these big companies,

3:32 there are really only two types of bankruptcy that are worth mentioning.

3:35 Chapter 7 and Chapter 11.

3:38 Chapter 7 is probably what you think of when you think of bankruptcy.

3:41 The business or the individual has all of their assets collected and sold off.

3:45 Depending on where they file,

3:47 individuals may have some exemptions for things like their family

3:50 home or a modest vehicle to get them to work.

3:52 Either way, once these assets are liquidated,

3:54 the proceeds from the sale are used

3:56 to pay back debtors according to their seniority.

3:58 And once that is done, the case is considered settled.

4:01 However, there are still certain restrictions placed on the bankruptcy

4:04 entity for a set period of time afterwards.

4:07 For individuals, they may be limited from travel,

4:10 certain jobs, or starting a business.

4:12 And for businesses themselves,

4:13 this kind of bankruptcy almost always means that it's basically game over.

4:17 Operations will cease, staff will be laid off,

4:19 and investors will be holding on to nothing of value.

4:22 It's pretty grim, but it is also pretty straightforward.

4:26 It's financial start from zero.

4:28 However, most of the major companies you hear

4:31 about going through bankruptcy don't take this route.

4:33 They instead file for chapter 11.

4:36 If you are a CEO of a company that files for chapter 11 bankruptcy protection,

4:39 you effectively hand over partial control of the business to a bankruptcy court,

4:42 but for the immediate future,

4:44 you are still allowed to run the business like normal,

4:46 except that the people your business owes money to legally have to wait in line.

4:50 Now, this isn't a get out of jail free card.

4:53 The ultimate goal of the bankruptcy court is

4:54 still to get the lenders their money back.

4:57 But the difference in these cases is that often the biggest

4:59 asset that big businesses like these have is the business itself.

5:04 Brand recognition, ongoing contracts, a team of trained staff in place,

5:08 and the systems to make them all work together.

5:10 These components often have a greater value

5:12 together than the sum of their parts individually.

5:15 This means that often the best way

5:16 to raise money to pay back everybody the business

5:18 owes to is either to continue running

5:20 the businesses and organize an extended payment plan.

5:23 Or if that's too complicated, an even simpler solution is just

5:27 to separate the business operations from the business

5:29 itself and sell them free and clear of its debt to another potential buyer.

5:34 This leaves behind a shell of a business with nothing

5:36 in it apart from the money from the sale,

5:38 which should hopefully cover the outstanding debt owed to lenders.

5:42 This is the reason why you always hear about businesses declaring bankruptcy,

5:45 but you still see them operating.

5:47 And there are some clear reasons why this has become more popular.

5:50 When a company is put up for sale while actively going through bankruptcy,

5:54 it lets them do what is called a 363 sale, which has a lot of legal limitations,

5:59 but it also has a lot of big and unintentional advantages,

6:02 which makes them extremely attractive targets for private equity.

6:06 If you look at some of the more high-profile bankruptcies from recent years,

6:09 you will probably notice a trend.

6:11 Del Monty filed for Chapter 11 and got additional loans

6:14 to continue its operations until it could find a buyer.

6:16 Claire's, the earpiercing boutique,

6:18 filed for Chapter 11 bankruptcy before being sold to a new buyer.

6:22 And everybody's favorite family-friendly restaurant, Hooters,

6:25 also filed for Chapter 11 before being sold off to the original

6:28 owners who declared that they were going to rehooerize the brand.

6:31 Whatever that means.

6:32 Although, actually, I don't want to know.

6:34 If you want another example,

6:36 the sale of Dunder Mifflin from the office after the company

6:39 went bankrupt was almost certainly some version of a 363 sale.

6:43 The head office and the official company went bankrupt,

6:45 but the actual paper pusher operations of the business

6:48 were sold off to a new buyer.

6:50 A 363 sale is normally done as quickly

6:52 as possible so that lenders can get their money back.

6:55 The company being sold is also legally motivated.

6:58 And the fact that the business is sold free and clear by the courts,

7:00 means that an acquirer, likely a private equity firm or competitor,

7:04 can buy these companies with far less due diligence than they

7:06 would otherwise require to make sure that there are no unforeseen liabilities.

7:11 Before that sale even goes to auction,

7:12 the bankruptcy court usually picks one buyer to go

7:15 first and put a real number on the table.

7:17 That opening bid sets a floor price and forces everyone

7:21 else to either beat it or stop pretending they were interested.

7:24 That first bidder is called the stocking horse,

7:26 and they usually get a small breakup fee if someone else outbids them.

7:30 The accelerated pace of a 363 sale also has

7:33 some other hidden advantages when it comes to another regulator,

7:36 but we will get to that later.

7:38 A happy little irony of all of this is

7:40 that once a private equity firm acquires a company,

7:42 their first step is usually to load it up

7:44 with even more debt to maximize their potential returns.

7:47 A business with a lot of debt is more

7:49 likely to run into financial difficulties in the future,

7:51 making them more likely to file for Chapter 11 bankruptcy

7:54 and in turn be sold off through a 363 sale.

7:57 This has created some situations that would almost be comical if it

8:00 wasn't for the fact that millions of jobs were on the line.

8:03 A report by Bloomberg found that in 2023 and 2024,

8:06 a total of 60 large companies filed

8:08 for bankruptcy two times or more within the period.

8:11 Party City, in particular, was sold off from over a billion dollars in debt.

8:15 And then just 14 months later, it declared bankruptcy again.

8:19 As the private equity industry has grown,

8:21 it has naturally created a greater supply

8:23 of companies pushing their finances to the extreme.

8:25 And it's benefited from the greater supply

8:27 of companies that pushed a little bit too far.

8:30 It's a lovely little self-fulfilling system

8:32 that has made declaring bankruptcy for businesses

8:34 a lot like getting fired for workers any more than two decades ago.

8:38 And these were both considered a big deal.

8:40 But today, it's almost the expectation that it will

8:43 eventually just happen to everybody at one point or another.

8:46 However, to play devil's advocate, maybe this isn't such a bad thing.

8:51 We have uh clearly been somewhat critical

8:53 of private equity in the past on this channel,

8:55 but that doesn't mean that just because they are involved,

8:58 this should be instantly written off, right?

9:01 If the actual operations of the company

9:03 get sold wholesale and remain mostly intact,

9:05 lenders get their money back without having

9:07 to go through an extended arbitration process,

9:09 the business might theoretically get better management.

9:11 And most importantly,

9:12 the regular employees won't lose their jobs in a company that ceases to exist.

9:16 If this really were the only factor at play here,

9:19 it would simultaneously explain why major bankruptcies

9:21 have become so common outside of a recession,

9:23 while simultaneously making it seem like there

9:25 isn't actually anything to be worried about.

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10:39 One of the biggest hidden advantages

10:41 of buying a business going through a chapter

10:42 11 bankruptcy is that everybody wants things to move as quickly as possible.

10:47 Regular business acquisitions can take several

10:49 months of back and forth negotiations.

10:51 And major deals like whoever ends up owning Warner Brothers will

10:54 probably take years of due diligence before the keys are handed over.

10:58 Now, apart from costing a lot of money and fees

11:00 to the lawyers and investment bankers that put these deals together,

11:03 a regular protracted sale also gives more time for the FTC

11:06 to step in and deem the sale to be anti-competitive.

11:09 Bankruptcy sales are still technically beholden

11:11 to that same kind of enforcement,

11:13 but they normally get a much lighter touch for three simple reasons.

11:17 The first is that the FDC doesn't really

11:19 want to be the ones responsible for stopping

11:21 a sale when the alternative is the business being

11:23 liquidated and all of the workers losing their jobs.

11:26 The second reason is that even if the FTC does

11:28 block the sale and the company completely ceases to operate,

11:31 then that doesn't really change anything anyway.

11:34 There are still fewer competitors in the market.

11:36 And the third reason is that these sales are normally rammed through

11:39 so quickly that underfunded and understaffed

11:41 regulators just don't have time to react.

11:44 It's also important to remember that for a company

11:46 to have the power to set their prices without competition,

11:49 they don't need to be a monopoly nationwide.

11:51 They just need to have a monopoly within a local area.

11:54 When the pharmacy chain Ryade filed

11:56 for bankruptcy last year for the second time,

11:58 it sold off its individual operations to two major buyers, CVS and Walgreens.

12:04 This expanded the areas of the national map where these two companies

12:07 are the only option to fill a prescription or buy basic medication.

12:11 Now, this is obviously bad, but if the bankruptcy boom really is

12:14 just a result of increased corporate shenanigans,

12:17 then at least it's not a recession indicator, right?

12:20 So anyway, the second major driver of heightened corporate bankruptcies is

12:24 that we are entering the find out stage of the business cycle.

12:28 While companies continuously going through the bankruptcy cycle

12:31 washer over and over again have skewed the statistics,

12:34 those very same tricks are also suppressing a lot of figures as well.

12:38 Some businesses now don't even go through the official chapter 11 process,

12:42 choosing instead to settle with creditors directly

12:44 by trading their debt for stock in their business,

12:47 which can relatively easily be sold along in private equity markets.

12:51 These figures are much harder to track because by definition,

12:54 they are intentionally kept out of the public court system.

12:57 But a report by Cornerstone Research,

12:59 the same firm that has been tracking the large bankruptcies,

13:01 found that these outofc court settlements hit

13:03 a record high in the first half of 2025.

13:06 So yeah, not only are there more official bankruptcies,

13:10 there are now more hidden bankruptcies happening amongst major firms as well.

13:14 As for the smaller businesses and even individuals,

13:17 it's also important to remember

13:18 that declaring bankruptcy is ironically really expensive.

13:23 Hiring a bankruptcy lawyer and going through

13:25 the court process generally costs thousands of dollars,

13:28 which most people in genuine financial distress just don't have.

13:32 All of this is to say that unfortunately

13:34 this trend isn't exclusively just the result

13:37 of businesses using the bankruptcy system as a convenient

13:40 little packaging solution for their mergers and acquisitions.

13:43 Interest rates have been far higher in the past and businesses

13:46 on average survived much longer back then than they do now.

13:50 But the difference is that today we are

13:52 coming off almost two decades of extremely cheap money.

13:55 In the past, borrowing money to run a business was seen as incredibly risky,

13:59 if not downright irresponsible.

14:02 Today, the culture has adapted to these cheap rates to the point

14:05 where it's irresponsible not to leverage some debt in your operations.

14:09 Again, the rise of private equity and their infinite

14:11 financing loops definitely contributed to this trend.

14:14 But even regular businesses have been systematically sold on the idea

14:17 of using credit products like overdraft facilities to leverage their operations.

14:21 Now, in a low interest rate environment, this is not inherently a bad idea.

14:26 But when rates rise, it can quickly catch up with businesses

14:30 and even individual people faster than they expect.

14:33 You have probably heard about zombie companies,

14:35 which are firms that have been kept alive after they should have

14:38 died by a combination of low interest rates and generous government incentives.

14:42 Well, over the last two decades,

14:44 we have slowly cultivated a pretty large mob of these zombies,

14:47 which means that naturally, as these support systems fall away,

14:51 there will be an uptick in these companies meeting their inevitable fate.

14:54 If anything, the most recent bankruptcy boom could

14:57 be seen as making up for lost time.

15:00 But that doesn't mean it's not dangerous.

15:02 Even while in theory,

15:04 new trends in business bankruptcy might maintain operations, they often don't.

15:08 And even when they do,

15:09 the second item on the agenda for the acquiring company after taking

15:12 on even more debt is to cut down on operational expenses wherever possible.

15:17 Most of the time that means closing underperforming

15:19 locations or combining operations to save on costs.

15:23 This has hit even usually resilient industries like healthcare.

15:26 Policy shakeups around subsidies combined

15:28 with heightened debt servicing costs have caused

15:30 a lot of providers to get rolled in with competitors on bigger networks.

15:34 From a patient perspective, this is not a great outcome because it clearly gives

15:38 them fewer real options where they could get their care from.

15:41 But it also means that doctors, nurses,

15:43 and support staff may be in a position where

15:45 all of the potential job opportunities within a reasonable

15:48 distance of where they live are all being

15:50 offered by the same healthcare group behind the scenes.

15:53 Then of course there is the final piece of the puzzle,

15:55 which is that even though consumer demand is strong overall,

15:59 businesses are being stretched to serve one of two customers.

16:02 The first are the budgetconscious shoppers who are extremely price

16:05 sensitive and another group who have more disposable wealth than

16:08 ever before who are paying exorbitant amounts of money

16:11 for exclusive goods just so other wealthy people can't have it.

16:14 The regular businesses in the middle are

16:16 genuinely struggling the most with this trend

16:18 and they are generally responsible for a lot of regular everyday jobs.

16:22 If you want to see a perfect demonstration

16:24 of this exact trend in motion right now,

16:26 watch our video on how the gig economy has become

16:29 massively overcrowded with people desperate to find work wherever they can.

16:32 And don't forget to like and subscribe to keep on learning how money works.