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Bankruptcy Alternatives If Your Marijuana Biz Fails

By George Khoury, Esq. on July 05, 2017 | Last updated on March 21, 2019

The legal marijuana businesses that have cropped up recently are true pioneers in the industry. Over the years, many have faced federal raids and prosecutions due to the conflict between state and federal law. However, there are several other unintended consequences of the conflict between state and federal law when it comes to the cannabiz.

In addition to not being able to conduct business across state lines, legal marijuana vendors also cannot claim protection from creditors in the federal bankruptcy courts. Again, this is due to the fact that marijuana is still considered a schedule I controlled substance under the federal anti-drug law, the Controlled Substances Act.

No Bankruptcy for Pot Businesses

Due to the Controlled Substances Act, and the associated scheduling of marijuana as a drug with no medical benefit, bankruptcy courts have refused to grant bankruptcy protection to marijuana businesses. This is largely a product of the way business bankruptcies works.

When a business declares bankruptcy, business assets will be transferred to a bankruptcy trustee to manage and/or sell off in order to satisfy and reconcile debts owed to creditors. However, because many of a marijuana business's assets include marijuana, marijuana products, paraphernalia, or cash derived from the sale of marijuana, bankruptcy courts are reluctant to transfer assets considered illegal by federal law to a trustee. Additionally, a trustee could then be required to violate federal law by selling marijuana products.

Options for Cannabiz Bankruptcy

If your marijuana business is failing, seeking out assistance from an experienced bankruptcy attorney is still a good idea. While federal relief may not be available at the outset, there may be ways to sanitize the business before filing in federal court for protection. Additionally, selling off assets and assigning rights to creditors may also be a viable option to escape insurmountable debts. Lastly, some states provide avenues for debt relief that do not involve federal law such as receiverships and assignments for the benefit of creditors.

Another potential option can involve selling the entire business including all the business's debts. Due to the highly regulated nature of the marijuana business, selling an established business, even one that is failing, can provide a new vendor a quicker and easier way to get through all the red tape. However, due to the regulations, which will vary from state to state, doing so can be incredibly complex.

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