By Ajay Raju
With 446 large corporate bankruptcy filings in 2025, a 12% increase above pandemic levels and the highest year-to-date total since 2010, the nation may be facing a corporate distress crisis that rivals the 2008-2009 financial meltdown.
These bankruptcies may be an early warning of systemic risks building across multiple sectors, from commercial real estate to housing, that could converge into a perfect storm if the Federal Reserve fails to act decisively in September. The debate is no longer whether stress exists—it plainly does. The real question is whether policymakers will recognize the urgency of the moment and take the bold action necessary to prevent a broader economic unraveling.
The bankruptcy surge
The numbers tell a stark story. July 2025 saw 71 large company bankruptcies, the highest single-month total since July 2020. The escalation began in April 2025, with 371 large companies filing for bankruptcy in the first six months of the year. Chapter 11 filings have increased 22% compared to the first quarter of 2024, with private equity-backed companies representing most of large U.S. bankruptcies in the first quarter—a clear indication that the leveraged business models of the low-rate era are crumbling under current financial conditions.
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The casualty list reads like a roll call of American retail history: Forever 21’s parent company filed for Chapter 11 in March 2025 and announced plans to close all 350 domestic locations, marking an exit from the U.S. market. Joann Craft Stores filed for bankruptcy for the second time in less than a year, ultimately closing all 800 U.S. stores by May 2025. These cases follow earlier bankruptcies of chains like Rite Aid and Party City, which, though they filed in prior years, continue to shrink their footprints. In all, U.S. retailers announced nearly 6,000 store closures this year, a sharp jump from 2024, signaling a contraction in physical retail with ripple effects across supply chains, landlords, and local economies.
The housing market
If corporate bankruptcies are the headline grabber, the housing market may be the more reliable predictor of what could be coming. According to Bloomberg, home-purchase contracts in the U.S. were canceled at a record rate in July 2025, with about 58,000 agreements falling through—equivalent to 15.3% of homes that went under contract. This represents the highest cancellation rate for a July in data going back to 2017, signaling a fundamental breakdown in housing market confidence.
This collapse in housing transactions isn’t simply about high mortgage rates or elevated home prices, though both factors play a role. Buyers are experiencing economic nausea—a combination of uncertainty about trade policies and tariffs that are showing up in higher prices (inflation), rising unemployment numbers that make job security questionable, and the compounding burden of much higher home insurance and property taxes.
The housing market serves as a particularly sensitive barometer because home purchases represent the largest financial decision most Americans will make. When contract cancellation rates spike to these levels, it indicates a loss of confidence in future economic stability. Buyers are essentially voting with their feet, deciding that the combination of high costs and economic uncertainty makes homeownership too risky.
This housing market stress has direct implications for the broader financial system. Banks hold substantial mortgage portfolios, and a sustained decline in housing activity threatens both mortgage origination revenues and the value of existing loan portfolios. Moreover, the wealth effect from housing price declines can reduce consumer spending across the economy, creating a feedback loop that amplifies the existing corporate distress.
The small-cap
The most severe damage may be occurring among smaller companies. The Russell 2000 tells a particularly troubling story: 43% of companies were unprofitable in late 2024, the highest percentage since 2020 and exceeding even the 41% seen during the 2008 financial crisis. Interest expense as a percentage of total debt reached 7.1% for Russell 2000 companies—the highest level since 2003.
This is particularly alarming because it suggests the current crisis may be more pervasive among smaller businesses than previous major economic downturns. Small-cap companies typically serve as the backbone of local economies, providing employment and services that larger corporations cannot efficiently deliver. Their distress threatens not just individual businesses but entire communities.
The trucking industry exemplifies these challenges. CLB Trucking’s recent bankruptcy filing in Pennsylvania illustrates the brutal economics facing independent operators. Operating costs are climbing faster than rate increases, driver shortages have pushed wages up 15-20%, fuel volatility erodes thin margins, and economic uncertainty causes shippers to tighten budgets. For smaller carriers operating on 2-3% profit margins, these pressures create an unsustainable environment.
The significance extends beyond individual company failures. Smaller carriers move majority of America’s freight, making their viability crucial for supply chain resilience. The failure of these businesses threatens to create capacity constraints that could drive up shipping costs and contribute to inflationary pressures.
The employment outlook
The human cost of this corporate distress extends far beyond balance sheets. Youth unemployment among recent graduates aged 20-24 has averaged 8.1% over the last three months—the highest rate in four years and matching levels seen during the 2008 financial crisis. This is particularly concerning because it affects the next generation of workers just as they attempt to enter the job market.
Companies facing financial pressure are increasingly turning to artificial intelligence and automation to cut costs, with entry-level positions being among the first casualties. This creates a dual challenge: fewer job opportunities for young graduates and the elimination of entry-level positions that traditionally served as stepping stones into corporate careers.
The reliance on AI for cost-cutting represents a fundamental shift in how companies respond to financial stress. While automation can provide short-term relief by reducing labor costs, it eliminates the human capital development that historically drove long-term economic growth. This creates a structural problem where economic recovery may not translate into job creation as it has in previous cycles.
Commercial real estate
Perhaps the most immediate casualty may be commercial real estate (CRE), where nearly $1 trillion in loans are set to mature in the next year. Many of these loans have already been extended once, and refinancing remains difficult as interest costs have jumped sharply from the ultra-low levels of the past decade. While not all CRE debt is floating-rate, a significant share is exposed to rate resets, leaving many borrowers struggling to make deals work even with credit spreads still relatively tight.
This could represent a ticking time bomb for the banking system. Unlike residential mortgages, which are typically held by government-sponsored enterprises or securitized, commercial real estate loans are predominantly held on bank balance sheets. A wave of CRE defaults could therefore directly impact bank capital and lending capacity, potentially triggering a credit crunch that would amplify the existing corporate distress.
The CRE crisis is particularly acute because it combines multiple problems: elevated interest rates that make refinancing prohibitively expensive, declining property values due to structural changes in office and retail demand, and reduced rental income as tenants struggle with their own financial challenges. The combination creates a perfect storm where borrowers cannot service their debt, lenders face potential losses, and the broader financial system confronts systemic risk.
The federal reserve
The Federal Reserve has the tools to address the interest rate component of this developing crisis, but only if it acts decisively. A 50 basis point rate cut in September could provide meaningful relief to floating-rate borrowers and improve refinancing conditions for maturing loans. However, smaller rate cuts or delayed action may be insufficient to prevent a cascading series of defaults.
After years of near-zero rates that allowed highly leveraged companies to refinance debt at manageable costs, the rapid increase in interest rates has created a refinancing crisis for debt-heavy businesses. Companies that accumulated significant debt during the low-rate environment now face much higher borrowing costs as their debt matures. The challenge extends beyond immediate refinancing needs. Higher interest rates increase working capital costs, reduce the present value of future cash flows, and make it difficult for companies to invest in growth initiatives that could improve their competitive position. For companies already struggling with operational challenges, higher borrowing costs often prove to be the final straw.
In short, the Federal Reserve faces a critical decision in September. A modest 25 basis point cut would signal acknowledgment of economic stress but may be insufficient to address the scale of the refinancing challenge. We need a more aggressive 50 basis point cut to provide meaningful relief. The case for a 50 basis point cut is compelling from a financial stability perspective. Such a move could help prevent a cascade of CRE defaults, provide relief to small businesses struggling with debt service, and restore confidence in housing markets.
Last word
While the Fed must balance concerns about reigniting inflation, particularly given ongoing supply chain disruptions and trade policy uncertainties, it should act with sufficient force and speed. A 50 basis point rate cut in September would demonstrate recognition of the gravity of current conditions and provide meaningful support to the economy during a critical period.
(Ajay Raju, a venture capitalist and lawyer, is the author of The Review, a column that attempts to decode the patterns emerging from the unprecedented shifts reshaping our world. In a world where adaptation is survival, The Review offers a compass for the journey ahead).