EntityCheck has reviewed over 700 bankrupt companies and conducted a study of how 260 companies have experienced the bankruptcy process during the 2023 through 2025 period. The analysis found that almost all the companies studied had measurable warning signs 12 to 24 months prior to filing for bankruptcy. This indicates that there was data that most people were simply not paying attention to.



An example of this is Bed Bath &amp; Beyond (BBBY). Prior to filing for bankruptcy, the company's EBITDA (a measure of operating profitability) indicated declining supplier support, a widening gap between inventory strategy and real customer demand, and deteriorating liquidity. These did not occur overnight but had been developing over several quarters.



Bankruptcy is not an event; rather, it is a process. Before a company files for bankruptcy, there is a history of operational and financial-related failures that have occurred some time before the company filed for bankruptcy. Our analysis identifies three phases of the bankruptcy process: 



<ul>
<li>latency phase </li>



<li>strategic desperation phase</li>



<li>terminal spiral phase</li>
</ul>



Each of these phases has distinct identifying signals and a decreasing window of opportunity for businesses to act.



<h2>Phase 1: What a Company Looks Like Up to 35 Months Before It Files</h2>



Phase 1 is the critical point for lenders, investors, and auditors because the maximum number of options remains available. At this point, most businesses will have been ignored. A company in Phase 1 can be growing revenue and still appearing stable from the outside.



One of the earliest and most overlooked signals in this phase is how a company treats its vendors. EntityCheck founder Levon Gasparian, has seen this pattern repeatedly: “One of the first red flags I’ve seen over and over again, which I think gets glossed over by investors or lenders, is that vendors are getting paid increasingly late. People say, ‘Oh, it’s just cash flow issues,’ but that is a sign of liquidity issues that are probably worse than they’re letting on.” Strong top-line numbers can mask this kind of creeping deterioration for months before it becomes undeniable.



The best way to evaluate a Phase 1 company is through the use of the going concern warning. This is your best indicator of whether or not the entity will survive for 12 months without major changes. Sorrento Therapeutics received a similar warning 35 months before it filed for bankruptcy in 2023. It was the first documented signal in the database. Prior research indicates that 9% to 13% of companies that receive a going-concern warning will fail within the next 12 months.



Negative equity is another signal for companies in Phase 1. When a company has more liabilities than assets in its public filings, it will be obvious before the company collapses. Sorrento's assets were less than its liabilities 24 months before its bankruptcy filing. This was readily apparent from its public filings. 



Using the Altman Z-score, which uses five financial ratios to measure bankruptcy risk, can also be useful in your evaluation. Any company with a Z-score below 1.8 is likely to experience high distress. Several companies fell below this threshold during Phase 1 while still showing revenue growth.



Revenue growth, in particular, is a signal that requires careful scrutiny. Scott Boyer, Founder and Owner of National Document, LLC, learned this the hard way: “I once encountered a business with strong revenue flows, but it had incomplete or missing records. Based on my knowledge at the time, they were certainly going to go under because of how many payments they missed and overlooked. However, because they had so much demand and income coming in, I thought they would recover. They did not. This proved to me that no matter how seemingly strong your sales are, they’re not going to survive without a solid audit trail and records.” Another indication of Phase 1 is that companies have attempted to restructure and failed. Gasparian notes that some companies instead try to grow their way out: “If they’re already in a bad place, growing is just going to widen existing gaps.”



One company in the database, a healthcare staffing firm, lost $400 million in revenue due to a regulatory change. The firm attempted to restructure its debts, failed to find any buyers for the business, and filed for bankruptcy 12 to 16 months after the revenue loss.



Phase 1 is still a time when a company can turn itself around. Companies can still restructure, refinance, or engage outside advisers to help them solve their problems. However, that window of opportunity will diminish over time.



<h2>Phase 2: 6 to 12 Months Before Filing, Management Knows but Isn't Saying So</h2>



In Phase 2, the board and executives have already internalized the scale of the problem. Restructuring discussions are underway. Liquidity pressure is real, but the public narrative stays vague. External disclosure lags internal reality by months.



When a company announces it is &#34;exploring strategic alternatives,&#34; that phrase almost always means the board has initiated a sale process or begun preparing for restructuring. 



Leadership departures are another Phase 2 signal. Across the 260 companies studied, CEO and CFO departures clustered roughly 4 to 6 months before bankruptcy filings. These transitions are usually framed as routine. The timing tells a different story. Gasparian is direct on what a CFO departure signals: “When the CFO leaves, it usually indicates that the company is in crisis mode and that crisis management is underway. Leadership changes at that level usually means some serious, structural changes are being made.” Rami Sneineh, Vice President and Licensed Insurance Producer at Insurance Navy, has observed the same pattern at the board level: “When a firm begins to lose its way, the board usually removes visionary leaders in place of individuals who are experts in rescuing firms. The leader may simply appear to be moving on, but in the majority of cases, they are abandoning the company before it collapses.”



Companies in distress will also work to conceal operational deterioration in ways that don’t show up immediately in financial statements. Boyer has seen this with workforce decisions: “Businesses that are going under are not going to let it show, especially to their investors and lenders. They’ll often mask layoffs due to cash flow issues as removing employees who aren’t performing. Ninety percent of the time, these people are doing their jobs, and most are even good at it. The business just doesn’t have a choice.” These so-called performance-based departures, particularly in clusters, are worth scrutinizing in the context of other Phase 2 signals.



Governance gaps matter too. SVB Financial left its Chief Risk Officer role vacant for 11 months before its collapse. That was in public filings. An unfilled critical control function during a period of volatility is not a human resources issue. It is a risk oversight gap.



Auditor-management conflict is common in this phase. Party City's dispute with Ernst &amp; Young over a going concern warning began during Phase 2, long before the eventual auditor resignation and bankruptcy filing. Tension over financial disclosures is a signal that one party believes the company's public statements do not reflect its actual condition.



Phase 2 is the last meaningful window. Lenders and investors who recognize these signals can still reassess exposure or reduce risk. Those who wait for clearer indicators find the decision window has already closed.



<h2>Phase 3: The Signals in the Final 6 Months Are Confirmations, Not Warnings</h2>



During phase 3 of the process, the primary question becomes not if the company is going to file, but rather when it will do so. After lenders tightened their control over the company and liquidity options were exhausted, the management team could focus entirely on the legal process, as opposed to working on avoiding it.



An auditor’s resignation is one of the clearest signs that there is no longer any room for negotiation regarding the financial disclosures. It is very different from a going concern warning. Auditor resignations, according to our data, have typically occurred with about 60-90 days left before the company files for bankruptcy. For example, Party City filed for bankruptcy shortly after Ernst &amp; Young resigned due to a dispute related to a going concern warning being concealed.



When a company is delisted from a stock exchange, it signifies that they can no longer raise equity capital or meet the requirements for reporting. Tuesday Morning voluntarily delisted from Nasdaq at least one month prior to filing to close their last source of public financing.



Last-resort loans provided during the final 90 days before filing are not rescue financing. As Gasparian explains: “Those loans are probably just used to fund the bankruptcy. The difference is whether or not that financing is used to stabilize operations and turn the company around.” The vast majority of these loans provided short-term, heavily collateralized process financing to fund the legal and advisory teams needed to manage the bankruptcy process, not to prevent it.



In the case of cryptocurrency and other financial services companies, withdrawal freezes happen approximately one to three months prior to the company’s collapse. 



In addition, once one company collapses, it has the potential to cause its counterparties to experience distress associated with Phase 2 within weeks. 



<figure class="wp-block-table"><table><tbody><tr><td>Phase</td><td>Lead Time </td><td>Key Signals</td></tr><tr><td>Phase 1 – Latency</td><td>Up to 35 months</td><td>Going concern warning, negative equity, Altman Z-score &lt; 1.8, failed restructurings, revenue growth despite unsustainable debt</td></tr><tr><td>Phase 2 – Strategic Desperation</td><td>6–12 months</td><td>&#34;Exploring strategic alternatives,&#34; CEO/CFO departures, governance gaps, auditor-management disputes</td></tr><tr><td>Phase 3 – Terminal Spiral</td><td>0–6 months</td><td>Auditor resignation, stock exchange delisting, last-resort/process loans, cash or withdrawal freezes</td></tr></tbody></table></figure>



<h2>Why a Crypto Company Can Collapse in 60 Days While an Airline Takes 17 Months</h2>



The three-phase progression appeared in all 260 companies studied. However, the length of each phase varies significantly by sector, and misreading that timing is itself a risk.



Aviation is a slow-burn sector. Expensive physical assets, complex debt structures, and long-term aircraft leases stretch both Phase 1 and Phase 2. In one case examined, a major European aviation group began showing clear distress signals in March 2020 but did not file until December 2021: a 17-month timeline of emergency financing and creditor negotiations.



Retail often fails through inventory pressure. Bed Bath &amp; Beyond committed cash to large inventory purchases and private-label investment. As sales slowed, supplier payment demands accelerated while inventory sat. The pressure was visible in quarterly filings before the collapse.



Finance and crypto companies face liquidity risk, not asset or inventory risk. That is why they can fail faster. A crypto mining company filed for bankruptcy five months after its largest client went bankrupt, due to heavy reliance on a single counterparty. Distress can move from Phase 2 to Phase 3 within weeks.



Pharmaceutical companies often extend Phase 1. Drug companies can raise capital repeatedly through stock offerings, even while operating at a loss, because of anticipated regulatory approvals. When a key approval is rejected or delayed, the cash can disappear suddenly after years of accumulated losses.



The same going concern warning means different things in different sectors. In aviation, it may signal a long creditor negotiation ahead. In a crypto lender, it may mean liquidity disappears within weeks.



Investors should monitor Phase 1 signals across the portfolio, not wait for Phase 3 confirmation. That means tracking going concern warnings, Altman Z-scores below 1.8, negative equity positions, and failed restructuring attempts.



Final Word



Corporate bankruptcy almost always followed the same three-phase pattern. Signals appeared as early as 35 months before filing. As Gasparian puts it: “Companies don’t always know how bad things are, and it takes them longer to figure it out. By the time their numbers catch up with reality, the damage has probably already been done.”



Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.

EntityCheck's study of over 700 bankrupt companies reveals that nearly all had warning signs 12 to 24 months before filing for bankruptcy. Key indicators include declining supplier support, liquidity issues, and negative equity. The analysis identifies three phases of bankruptcy: latency, strategic desperation, and terminal spiral, each with distinct signals. Phase 1 is critical for lenders and investors, as companies may appear stable despite underlying issues. The study emphasizes the importance of monitoring vendor payment patterns and financial ratios like the Altman Z-score to assess bankruptcy risk.

Bankrupt Companies Showed These Warning Signs Months Before Filing