Resilient but stretched: the consumer at the center of rising bankruptcies

Article October 27, 2025

BOTTOM LINE UPFRONT

The U.S. consumer continues to power growth, but with thinner buffers and widening stress among lower-income households. While affluent consumers keep spending, higher borrowing costs, elevated tariffs, and fading savings are straining discretionary demand and compressing margins across import-exposed sectors. Credit markets remain wide open, enabling opportunistic refinancings ahead of the 2028 maturity wall, yet bankruptcies—especially in consumer-facing and real estate industries—remain elevated. Stability on the surface is masking mounting pressure beneath it, calling for disciplined pricing, agile forecasting, and vigilant liquidity management as we head into Q4.

The US consumer remains the core engine of growth, with spending resilient but increasingly selective as excess cash cushions thin and price sensitivity persists. Inflation has cooled from 2023 levels but continues to weigh on big-ticket demand. Borrowing costs – especially for revolving credit – remain historically elevated despite the Federal Reserve’s September rate cut to a 4.00-4.25% target range. This ‘resilient but stretched’ dynamic is squeezing Consumer Discretionary operators on three fronts: tariff‑driven cost increases, uneven consumer demand between prime and non‑prime cohorts, and persistent planning challenges tied to inventory and import timing.

The result is a two-speed economy: upper-income households continue to spend, supporting headline consumption, while lower-income consumers are increasingly constrained. This bifurcation is shaping everything from pricing strategies and inventory planning to credit performance and bankruptcy patterns. In credit markets, Q3 marked a decisive reopening, with issuer-friendly technicals and activity skewed toward opportunistic repricings, refinancings, and extensions ahead of the pronounced 2028 maturity wall. Default volumes have eased but remain concentrated in consumer-exposed sectors. Corporate bond prices have risen, spreads have tightened to near record levels, and investors see little risk of a major pullback in the near term.

Yet not all signals are benign. The bankruptcy cadence remains elevated in the middle market and has accelerated into late Q3, particularly across real estate and consumer-facing names. Following the recent blowups of subprime auto lender Tricolor and auto parts maker First Brands, JPMorgan CEO Jamie Dimon cautioned that lenders should be “forewarned,” remarking that “when you see one cockroach, there are probably more.” The sentiment underscores the prospect that stability on the surface may mask growing strain beneath it.

The consumer paradox: strong spending despite thinning cushions

Personal consumption expenditures (PCE) accounted for 68.2% of GDP in Q2 2025, roughly two-thirds of total activity. Growth re‑accelerated in Q2 to a 3.8% annualized pace, supported by firmer consumer spending but also an unusual drop in imports that mechanically boosted GDP rather than reflecting organic demand. In August, current‑dollar PCE rose 0.6% month-over-month, confirming that consumer demand remained strong into Q3.

Prices continue to restrain growth, though less severely than in 2023: the PCE price index rose 0.3% in August, with year-over-year PCE inflation at 2.7% and core PCE at 2.9%. The Fed responded with a risk‑management 25 bp cut on September 17, noting that job gains had slowed, and inflation remained somewhat elevated. The Fed’s modest September cut provided only symbolic relief: revolving credit APRs remain near record highs, keeping financing costs painfully high for non-prime borrowers.

Household financial cushions are thinner than at any time since the start of the pandemic. The personal saving rate stepped down to 4.6% in August, and real disposable personal income has been flat since spring (August’s seasonally adjusted annual rate (SAAR) was $18.10T SAAR versus April’s $18.17T). While this income level is enough to support continued spending, it limits the potential for growth without more price relief or a clear rise in wages. Consumer credit growth has slowed sharply over the past three years, falling from double-digit rates in 2022 to near-zero by mid-2025, as households and lenders alike pulled back amid higher borrowing costs and mounting delinquencies.

Source: St. Louis Fed

Consumer confidence reflects these crosscurrents. Readings from the University of Michigan’s Index of Consumer Sentiment bounced dramatically – falling to 52.2 in the spring, rebounding strongly to around 61 in June and July, then easing back to 55.1 in September. This volatility mirrors a consumer still spending overall but increasingly cautious and selective, particularly on big-ticket purchases. Sentiment trends also diverge sharply by wealth cohort: households in the top tercile of stock holdings remain significantly more confident than those with no equity exposure. The gap underscores the “two-speed” nature of the consumer economy – affluent households buoyed by capital-market gains and stable employment versus lower-income consumers facing depleted savings, higher borrowing costs, and limited financial buffers.

Source: University of Michigan

Pressure on consumer-focused operators

For Consumer Discretionary operators, 2025 represents a three‑front battle:

Pricing power is squeezed. Import‑exposed consumer categories such as apparel, electronics, and auto face higher costs due to new tariffs. With consumers increasingly price-sensitive, businesses have limited ability to pass these costs directly on to the shopper. As a result, companies are relying more on targeted promotions and managing product mix to protect market share, often accepting lower profit margins as a trade-off. This challenge is consistent with the 2025 tariff approach, which imposes materially higher effective rates across key consumer‑relevant areas, even while August PCE rose month‑over‑month. While timing effects between tariff collections and consumer prices may not align perfectly, the divergence between rising tariff costs and relatively steady consumer spending highlights a key ‘resilient but stretched’ dynamic: costs are increasing across import-heavy categories, yet consumers continue to spend, albeit with slowing momentum and thinner margins across the supply chain.
Source: St. Louis Fed & BEA
Demand is split along income lines. Financial data confirms that while prime borrowers remain stable, there is rising credit stress among non-prime cohorts. This dynamic is evident in auto loans, where the prime delinquency rate (60-days past due) was ~0.35% while subprime was ~6.43%. A similar pattern is visible in revolving credit: overall bank credit-card delinquencies reached 3.05% in Q2, well above their pandemic lows. Together, these metrics signal broader financial strain and widening divergence in spending capacity. To navigate this disparity, companies are leaning on mix adjustments, targeted promotions, and expanded financing to support lower-income demand while preserving profitability.
Uncertainty itself weighs on planning. The volatile tariff environment has disrupted normal trade patterns and complicated forecasting across the supply chain. Tariff deadlines early in the year caused companies to accelerate imports (pull-forward). The subsequent Q2 inventory reduction (or unwind) created distorted quarterly comparisons across the supply chain. This disruption led to lingering mismatches in import timing, freight costs, and gross margins. The most visible effect was in Q2, where net trade made an unusually large contribution to GDP as imports fell and companies drew down inventory to avoid duties. These effects have continued to ripple through Q3 inventory, freight, and gross-margin comparisons, making accurate forecasting difficult.

What to watch into Q4

Pass‑through in goods. Track monthly PCE goods categories to gauge how tariff‑related cost pressure flows into final prices and promotional cadence, with August PCE still posting month‑over‑month gains and tariff analyses indicating higher near‑term price levels across affected categories.

Transmission of policy easing. Assess whether the September 17 rate cut reduces household APRs and improves credit access, particularly for non‑prime card and auto borrowers.

Household buffers and paychecks. Monitor the personal saving rate (4.6% in August) and real disposable personal income (broadly flat since spring). These factors directly influence holiday sales volumes, average basket size, and the intensity of consumer trade-down behavior.

Credit normalization. Watch subprime auto and bank‑card 60+ day delinquency as indicators for big-ticket discretionary categories. Sustained improvement would support volumes, while further deterioration argues for more defensive merchandising and financing strategies.

Credit market update

Leveraged loans & high yield bonds

The U.S. leveraged loan market rebounded decisively in Q3, recovering sharply from the tariff-driven volatility that suppressed Q2 issuance. Primary syndicated loan volume reached ~$404.2 billion in Q3, up sharply from $115.5 billion in Q2. This marks the highest quarterly total on record, surpassing both the 2021 and 2024 issuance peaks.

PitchBook | LCD, Data through Sept. 30, 2025

Despite the headline surge in volume, net new supply remained limited – only about 18% of Q3 issuance (~$70.9 billion) funded new‑money transactions. The balance was opportunistic, dominated by repricings, refinancings, and extensions as borrowers took advantage of tighter spreads and renewed market access.

Repricings totaled $227 billion in Q3, marking the second‑highest quarterly tally on record. Year-to-date, investors approved about $440 billion of spread‑cutting amendments, trimming coupons by an average of 50 bps and saving issuers ~$2.3 billion in annual interest. Nearly half of 2025’s repricing cohort had already repriced in 2024, underscoring the persistence of opportunistic behavior.

Concurrently, refinancing issuance jumped to $72.8 billion, the busiest quarter since early 2024. This activity was led by B-minus borrowers, who drove 43% of the volume as they proactively addressed the looming 2028 maturity wall. ~$331 billion of loans are set to mature in 2028, with B- issuers accounting for $124 billion (37% of the total). These lower-rated borrowers are strategically capitalizing on the current tight-spread window (average new-issue spreads for B-minus loans tightened to S+366, the lowest since the global financial crisis) to extend maturities and reduce near-term default risk.

PitchBook | LCD, Data through Sept. 30, 2025

Amid a sluggish exit environment, private equity sponsors leaned heavily on dividend recapitalizations to deliver returns to limited partners and to generate liquidity. Through September 2025, dividend recaps totaled ~$34.7 billion – the highest level in at least seven years. Q3 saw the bulk of this activity: $29.1 billion in volume, marking the second-highest quarterly total on record. While these transactions provide near-term liquidity, they also increase leverage and extend maturities, signaling higher credit risk if underlying operating performance or economic growth slows.

Parallel strength in the bond market added to the momentum. High-yield issuance volume soared to $118 billion in Q3– a 17-quarter high and the busiest quarter since Q2 2021. September alone produced $55 billion of new deals as borrowers rushed to lock in post-cut funding costs. Refinancings dominated (79% of the volume, $93 billion). M&A and LBO issuance totaled $42 billion YTD Q3 2025, the most since 2021. New-issue spreads fell to T+259 bps, the tightest since 2021, and average yields on senior unsecured paper eased to 6.4%, the lowest since early 2022.

PitchBook | LCD, Data through Sept. 30, 2025

Credit losses & default risk

Credit losses and forward indicators were mixed to constructive, showing easing overall volume but rising risk in specific sectors.

Trailing 12-month speculative-grade default rates remained elevated at 4.8% in the U.S., 3.8% in Europe, and 3.6% globally by late Q3. The composition of defaults continued to skew toward distressed exchanges, which accounted for 56% of 2025 defaults through August, the highest year-to-date share since 2008. This metric highlights how many issuers are using exchanges to postpone restructuring or bankruptcy.
Global corporate defaults fell 30% quarter-over-quarter to 26 in Q3, bringing the year‑to‑date total to 89, an 18% drop versus the same period last year.
Sectoral stress has grown in consumer-facing areas (retail and restaurants), which comprise 31% of defaulted debt through September 2025, the vast majority of which was US‑ S&P cites subdued consumer demand, refinancing challenges, negative cash flows, and limited flexibility as drivers.
Looking ahead, the S&P base-case outlook is cautiously constructive, pointing to a modest easing of U.S. and European default rates to 4.25% and 3.25% by June 2026, with higher outcomes possible under more adverse scenarios.

Overall, Q3 reflected a market driven more by opportunism than expansion. Tight spreads, firm secondary pricing, and strong CLO demand allowed issuers—particularly in lower-rated tiers—to reprice, extend, and refinance ahead of the 2028 maturity bulge, even as default volumes eased, and the baseline outlook improved modestly into 2026. Near-term risks remain manageable, but the rising share of distressed exchanges and the consumer-sector concentration in defaults call for continued vigilance around liquidity management and covenant flexibility as pipelines for true new-money issuance gradually rebuild.

Bankruptcy filings

Source: Octus, data through Aug. 31, 2025

The cadence of corporate bankruptcies remains elevated in 2025, with companies reporting $10M+ in liabilities posting a 20% year-over-year increase through September (401 filings vs. 335 in 2024). The year’s run-rate continues to outpace even 2020’s COVID-era wave at this size tier, though $100M+ filings still trail 2020’s peak volumes. Momentum stayed firm across the quarter, with 44 filings in July, 48 in August, and 51 in September, bringing the cumulative tally to 401 by quarter-end.

Source: Octus, First Day Database

In the middle market (companies with $10M–$100M in liabilities) through September 2025, real estate clearly leads activity – accounting for ~61% of filings – and is up ~50% year over year versus 2024. Filing growth is also pronounced in consumer staples and industrials, while consumer discretionary remains elevated at a ~26% year-over-year increase; by contrast, healthcare activity in this band has softened, down approximately 12% versus last year.

At the top end, the $100M+ segment continues to “catch up” to last year’s pace: the deficit versus 2024 narrowed from about 14% at the end of Q1 to ~9% by Q2, and to only ~2.5% year to date by late August. The sector mix has shifted as well – healthcare, consumer staples, communication services, and materials show the greatest elevation in filing frequency relative to 2024, while consumer discretionary has waned from last year’s outsized presence but remains active.

Across case narratives, several themes are recurrent. Merchant cash advance (MCA) burdens are frequently cited by middle-market filers as a tipping point – debtors point to high effective costs and aggressive collections layered on top of stressed liquidity. Cost and demand pressures also remain visible: consumer-facing debtors reference higher food and labor costs and shifting consumption patterns, healthcare filers point to reimbursement delays and rising overhead, and airlines continue to flag excess capacity and softer passenger demand as key drivers.

Overall sector distribution of the 401 filings over $10M through September 2025 reinforces the concentration: real estate (~32%) leads by volume, followed by consumer discretionary (~18%), industrials (~16%), and healthcare (~10%).

Source: Octus, First Day Database

Conclusion

As 2025 enters its final quarter, the U.S. consumer remains the fulcrum of both economic growth and credit risk. Beneath the surface of resilient spending lies a deep bifurcation between households still fueled by wealth effects and those treading water amid higher costs and thinner buffers. Operators and investors alike should resist the temptation to read resilience as recovery. The same dynamics propping up topline demand – expanded credit access, promotional intensity, and inventory pull-forwards – are also compressing margins, distorting working-capital signals, and delaying true price discovery.

For operators, the next phase of this cycle will reward those who can dynamically model demand elasticity, working-capital timing, and tariff pass-through under multiple rate scenarios. Those who continue to treat pricing, promotion, and procurement as siloed levers will find themselves behind the curve when consumer sentiment or credit availability snaps back.

For investors, the current window of tight spreads and aggressive repricing should not obscure the underlying fragility. While dividend recaps offer short-term liquidity, they extend investor exposure to a strained consumer relying on borrowed dollars. Portfolio resilience in 2026 will hinge less on static leverage ratios and more on operational agility – cash conversion, cost discipline, and real-time margin visibility. These will be the true indicators of who can weather the next downturn in discretionary demand.

The high volume of distressed exchanges and the persistently elevated bankruptcy cadence, concentrated in consumer-facing and real estate sectors, suggest the market’s technical strength is built on shaky economic ground. The next default wave is unlikely to be sparked by a lack of refinancing options, but by the collision between opportunistically leveraged balance sheets and a fatigued consumer no longer able to support revenue growth.

Sources and references

St. Louis Fed
Pitchbook | LCD
Octus
BEA
University of Michigan
Fitch Ratings
S&P
WSJ
Bankruptcy Filings
Company earnings call transcripts and presentations

FAQ

How are rising borrowing costs and tariffs impacting Consumer Discretionary operators in 2025?

Higher financing costs and elevated tariffs are pressuring margins across import-heavy categories like apparel, electronics, and auto. Consumers remain selective and price-sensitive, limiting the ability to pass cost increases through. As a result, operators are relying more on targeted promotions, mix optimization, and tighter working-capital management to protect profitability.

What does the “two-speed consumer economy” mean for credit performance and bankruptcy risk?

Upper-income households continue to spend, supporting headline consumption — while lower-income consumers face depleted savings and rising delinquencies. This divergence is contributing to elevated defaults in consumer-exposed sectors and a pickup in middle-market bankruptcies. Businesses must dynamically plan pricing, credit, and promotional strategies to navigate uneven demand.

How should CFOs and PE sponsors prepare for the 2028 maturity wall amid persistent consumer-sector stress?

With credit markets currently constructive, borrowers are repricing and refinancing early to extend maturities and lower interest costs. Leaders should use this window to bolster liquidity, model multiple rate and demand scenarios, and strengthen operational levers such as cash conversion and cost discipline — positioning the portfolio to withstand a more fatigued consumer environment.

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