With 29 states and the District of Columbia running legal medical cannabis programs, there are now thousands of marijuana-related businesses in the U.S.
That includes businesses which grow the weed, as well as those which facilitate its growth, processing and sales.
According to the United States Trustee Program, which is a watchdog for U.S. bankruptcy proceedings, this prohibition also extends to real estate leasing and investment.
“It’s pretty safe to say that if your business is operating within the medical cannabis sector, it’s not going to be eligible for bankruptcy protection,” said Tom Howard of Royal Oak law firm Howard & Howard Attorneys PLLC (no relation).
Howard, who is part of the firm’s Cannabis Industry Group, says that marijuana’s continued classification as a Schedule I drug under the federal Controlled Substances Act is the legal reason for the prohibition.
“The bankruptcy system can’t be used as an instrument in the ongoing commission of a crime,” said Howard. “And according to federal law, marijuana is still an illegal substance—even if 29 states don’t exactly agree.”
Howard says the lack of a bankruptcy option could mean cannabis businesses will pay higher interest rates on loans or be required to put up more collateral.
According to Howard, it also means that restructuring debt will be practically impossible and entrepreneurs may have more personal liability to creditors.
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