Bankruptcy trends to watch in 2025

Former BL Stores

02/01/2025 11:00

By Dietrich Knauth
       Jan 2 (Reuters) -    Rising interest rates, inflation,
higher labor costs, and post-pandemic shifts in consumer
spending were common factors cited by companies that filed for
bankruptcy in 2024. Business bankruptcy filings rose 33.5
percent in the 12 months ending Sept. 30, 2024, according to
statistics from the Administrative Office of the U.S. Courts. 
    Bankruptcy experts expect those factors to continue to drive
companies over the brink next year. Several particularly
hard-hit industries that struggled in 2024 will continue to
experience financial distress and restructuring activity in
2025, including health care, automotive, casual dining and
retail. 
    
    HEALTHCARE
    Healthcare companies of all kinds filed for bankruptcy in
2024, including hospital chains, nursing homes and medical
device manufacturers. 
    Healthcare companies — particularly ones with high debt or
niche business models — are perennially at risk for bankruptcy
due to frequent changes in government regulation and
reimbursement spending, according to Ron Meisler, a partner in
Skadden's restructuring practice. 
    "There's always some trouble lurking in the healthcare
industry, because it's impossible to accurately predict year
over year where the change is going to be," Meisler said. "You
have to be prepared to play a bit of whack-a-mole."
    In 2024, Georgia-based nursing home company LaVie blamed its
bankruptcy in part on a new staffing rule that raised the
minimum level of nursing care that must be provided to each
resident, and Florida-based Clinical Care Medical Centers blamed
a change in Medicare and Medicaid reimbursement rates for its
Chapter 11 filing.
    Moreover, some companies that grew quickly in response to
unique demands during the COVID-19 pandemic are now facing
cutbacks. Respirator manufacturer Vyaire went bankrupt in 2024
after a COVID-era spike in demand, and 2025 will bring similar
stresses for companies like travel nurse staffing agencies and
remote mental health providers. 
    
    AUTO INDUSTRY
    The auto industry, including parts suppliers and electric
vehicle companies, will also face continued stress in 2025. A
drop in demand for electric vehicles wreaked havoc on companies
that ran up debts or took investor cash to compete in that
space, and prominent names like Swedish battery maker Northvolt
and electric vehicle company Fisker went bankrupt in 2024.
    Many companies that bet on an increase in electric vehicle
demand are still unprofitable, and they need to raise cash for
investments in technology and manufacturing. But lenders and
investors may be less eager to bail out struggling EV companies
after companies that generated huge amounts of investor interest
— like Fisker and Lordstown Motors — went bust. 
    "The public capital markets are not really designed to
support companies that are still, essentially, science
experiments," Meisler said. "It really puts the pinch on an
industry that looked very promising two to four years ago."
    Republican president-elect Donald Trump is also widely
expected to pull back support for electric vehicles by
eliminating consumer tax credits and easing regulations on
gas-powered cars. 
    Distress in the automotive industry goes beyond electric
vehicles, with auto parts suppliers like American Tire
Distributors, Wheelpros, and Accuride all falling into
bankruptcy in 2024. 
    Auto parts suppliers are still grappling with supply chain
disruption that dates back to the COVID-19 pandemic, and Trump's
proposed tariffs could cause further damage through the
industry. 
    Auto manufacturers have sought to protect themselves against
recent parts shortages by requiring their suppliers to maintain
higher inventory levels, a practice that shifts more cost and
risk onto smaller companies in the supply chain, according to
James Gellert of the credit risk firm Rapid Ratings. 
    Those supply chain risks would be exacerbated by tariffs,
because U.S. auto suppliers and manufacturers rely heavily on
parts from overseas, often re-selling them for relatively low
profit, Gellert added.
    Companies don't yet know whether extensive tariffs will be
enacted, or whether they will be used as a bargaining chip in
international trade talks, but S&P Global has estimated that
Trump proposed tariffs on Mexico, Canada and Europe could hit
auto parts suppliers hard, and ultimately cost European and
American carmakers up to 17% of their combined annual core
profits.
    
    CASUAL DINING AND RETAIL
    Casual dining saw a steep rise in bankruptcies in 2024,
headlined by famous restaurant chains like Red Lobster and TGI
Fridays. Several smaller chains like California Pizza Kitchen,
Bucca di Beppo, and Rubio's Coastal Grill also went bankrupt in
the past year.  
    Some of those restaurant brands, backed by private equity,
expanded too rapidly and then collapsed under their own weight,
while others have cited higher labor costs, especially in states
like California, when seeking bankruptcy protection. 
    Restaurant chains will continue to contend with higher
interest rates and inflation in food prices in 2025, forcing
customers to re-evaluate whether they will continue spending on
casual dining restaurants that were previously seen as offering
good value for the money, according to Randall Klein of Goldberg
Kohn.
    "The costs of running a restaurant business has gone up
significantly, and restaurants are not always able to pass those
costs through to their customers," Klein said. "Food prices have
gone up, check sizes have gone down, and people are going out to
eat less frequently."
    Retail, too, remains a challenge, continuing a years-long
"retail apocalypse" that has pushed companies like Big Lots,
Express, Party City, The Container Store,  Rue21 and Joann into
bankruptcy. 
    Like the casual dining and automotive industries, the retail
industry is hampered by a set of lingering factors that will
cause further stress in 2025, including high costs for labor,
supplies, and rent. Shopping has moved increasingly toward
online purchases and away from the traditional brick-and-mortar
retailers, a trend that accelerated during the pandemic. 

 (Reporting by Dietrich Knauth)
 ((Dietrich.Knauth@thomsonreuters.com;))