When Financial Trouble Hits: The Bankruptcy Barrier Facing Cannabis Companies
Cannabis businesses face a unique challenge that most other industries never have to think about: they can't file for bankruptcy. While this might seem like a technical legal issue, it creates serious real-world problems for business owners, employees, and investors when financial difficulties arise.
The Protection That Isn't There
Most businesses have access to bankruptcy courts when they face financial challenges. These courts offer a structured way to either:
Reorganize debts and continue operating (Chapter 11)
Liquidate assets in an orderly way that treats creditors fairly (Chapter 7)
For cannabis companies, neither option exists. The courthouse doors remain firmly shut, creating serious vulnerabilities in an already challenging industry.
Why Bankruptcy Courts Say No
The reason is straightforward: bankruptcy courts are federal institutions, and cannabis remains federally illegal under the Controlled Substances Act.
This creates an impossible situation for bankruptcy judges. They can't:
Administer assets that federal law considers illegal
Approve reorganization plans that involve ongoing cannabis operations
Reconcile their duty to uphold federal law with businesses operating legally under state law
It's Not Just Plant-Touching Businesses
This bankruptcy barrier extends further than many realize. Companies turned away from bankruptcy courts have included:
A commercial landlord who received 30% of rent from a dispensary tenant
A soil and nutrients supplier whose products were marketed to cannabis growers
A security company specializing in cannabis transportation
An equipment leasing company with cannabis cultivation clients
Even businesses one or two steps removed from direct cannabis sales have found themselves locked out of bankruptcy protection.
What Happens Without Bankruptcy Protection?
When cannabis businesses face financial trouble without bankruptcy as an option, the consequences are often harsh:
Unfair Leverage to Creditors Without the "automatic stay" that bankruptcy provides, aggressive creditors can seize assets while others get nothing, creating a chaotic race rather than fair treatment.
No Fresh Start for Entrepreneurs Cannabis business owners often personally guarantee loans. When businesses fail, owners face personal financial devastation without the clean slate bankruptcy normally provides.
Disorderly Business Closures Instead of managed wind-downs under court supervision, distressed cannabis operations often close abruptly, leaving employees without warning and vendors unpaid.
Forced Sales at Deep Discounts Struggling cannabis businesses frequently sell for far below market value because they can't use bankruptcy to restructure debts and continue operations.
Some Courts Finding Middle Ground
A few courts, primarily in western states with established cannabis industries, have shown more flexibility:
Allowing bankruptcy for businesses with very distant connections to cannabis
Permitting companies that have fully exited cannabis operations to file
Evaluating cases individually rather than dismissing any case with cannabis ties
"The mere presence of marijuana near a bankruptcy case should not automatically prohibit a debtor from relief," wrote one Ninth Circuit bankruptcy judge. "Each case deserves individual examination of how directly the business intersects with cannabis."
What Cannabis Businesses Can Do Now
Until federal law changes, cannabis companies need to prepare differently:
Build stronger cash reserves than typical businesses
Include detailed wind-down provisions in operating agreements
Research state receivership options where available
Consider mediation clauses in major contracts
Structure transactions with the lack of bankruptcy protection in mind
Looking Forward
The bankruptcy barrier highlights the strange position of the cannabis industry: legally operating under state law while facing significant federal restrictions.
This situation affects not just struggling businesses but the overall stability of the industry. Without bankruptcy protection, cannabis remains a higher-risk sector for investment and lending—making capital more expensive and harder to secure.
For now, cannabis businesses must navigate this challenging landscape through careful planning and strong financial management. Meanwhile, the industry continues to watch for federal reforms that would finally allow these companies the same basic protections available to other legal businesses.