Bankruptcy poses a significant legal and economic challenge, often resulting in lengthy and costly court proceedings. Mediation, on the other hand, offers a more flexible and effective solution by facilitating negotiations and debt restructuring, potentially helping to avoid bankruptcy. However, the role of mediation in preventing bankruptcy under Bahraini law remains underexplored. This study highlights mediation within the framework of the Bahraini Reorganization and Bankruptcy Law of 2018, distinguishing it from preventive settlement and assessing its effectiveness in practice. The study relies on an in-depth legal analysis, reviewing Bahraini legislation, court decisions, and regulatory guidelines while drawing on legal commentary and international best practices. Through comparative analysis, the study clarifies the legal and procedural differences between mediation and preventive settlement and presents practical cases to evaluate the role of mediation in preventing business collapse. This paper aims to contribute to developing effective mechanisms for preventing bankruptcy by highlighting mediation’s ability to enhance business continuity, reduce litigation burdens, and encourage amicable dispute resolution. By strengthening the role of mediation within the framework of bankruptcy laws, the research seeks to support the development of more efficient and sustainable legal mechanisms to ensure a stable business environment in Bahrain.