> While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening?

While debt servicing you have less liquidity. That liquidity might be required to react to changes in the market / stay competitive. So the long term health of the company is likely going to be impacted some.

EDIT: embarrassing typo