Why Cannabis Companies Can’t File Bankruptcy

December 11, 2019by Harry Shurek0

In the aftermath of the COVID-19 pandemic, more businesses than usual are expected to file for bankruptcy. Unfortunately for those in the cannabis industry, filing bankruptcy isn’t a possibility. 

Even so, this doesn’t mean you’re out of luck. 

What It Means to File for Bankruptcy 

When a business files for bankruptcy, the federal court helps them to pay off or eliminate lingering debts, and provides guidance and protection through the process. Most businesses are eligible to file under one of three types of bankruptcy:

  • Chapter 7: Businesses filing for Chapter 7 typically have large debts, and it’s not possible to restructure them.
  • Chapter 11: Businesses filing for Chapter 11 don’t necessarily shut down. Those that remain open operate with the help of a court-appointed trustee. They submit a recovery plan to creditors, who can either accept or reject it.
  • Chapter 13: Most sole proprietors can file for Chapter 13. Also called personal bankruptcy, this type involves the business owner submitting a repayment plan with the court.

Why Cannabis Companies Can’t File Bankruptcy

While most businesses, large and small, are eligible to file for at least one of the above types of bankruptcy, cannabis companies aren’t. This is because the federal court handles bankruptcy cases.

Medical cannabis is legal in 33 US states and recreational cannabis is legal in 11—both, however, are still illegal on the federal level. Because the federal government doesn’t recognize cannabis businesses as legal, these companies can’t go through federal legal channels when they run into financial trouble. Even hemp businesses, now legal in all 50 states and Washington, D.C., are facing pushback when it comes to filing bankruptcy.

Alternatives to Bankruptcy for Cannabis Businesses

While your cannabis business can’t file for bankruptcy, you do have other options if you’re struggling financially.

One is to work with your creditors outside of any court system and come to a mutual agreement. If you can’t reach an agreement, you can turn to assignment for the benefit of creditors or receivership.

Created under state law, assignment for the benefit of creditors provides an alternative to Chapter 7 bankruptcy. So long as you’re operating within the laws of your state, you can assign your assets to a third party. The third-party neatly wraps up your business affairs.

With a receivership, a third-party called the “receiver” is hired to protect a company and help creditors recover funds in default. The receiver can also help companies with their restructuring processes to avoid liquidating all assets and going out of business.

Under receivership, the receiver operates the business and makes essential decisions. They take control of business assets, determine what needs to be done, and work to pay creditors. While the goal is to avoid going out of business, the receiver may decide to sell off certain assets to pay your creditors and bring you toward recovery.

Get Help Before Bankruptcy

Running a cannabis business can be complicated. The inability to file bankruptcy when you’re in financial trouble can make it even more so. If you need help managing your finances, My Cannabis Accountant is here to help. Contact us today for more information.

Harry Shurek

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