Intoxicating Hemp Companies Facing the Ban Should Consider Federal Bankruptcy Relief Early
November 25, 2025
The “loophole” that for years exempted intoxicating hemp from the prohibitions of the Controlled Substances Act (“CSA”) is set to close on November 13, 2026, following the federal ban enacted earlier this month. Companies that manufacture, distribute, sell, or purchase intoxicating hemp products (“IH Companies”) and are, or anticipate, experiencing financial distress have less than one year to take advantage of the full toolkit available under the U.S. Bankruptcy Code, which offers unique advantages over state insolvency processes and out-of-court workouts.
But IH Companies should not wait. Distressed IH Companies should consider filing for bankruptcy soon to maximize their chances of completing a court-supervised reorganization or liquidation before the ban takes effect. Waiting until the final months of the one-year “grace period” to commence a bankruptcy case increases the risk of dismissal, given that bankruptcy courts have routinely dismissed cases where the debtor’s assets include products that are illegal under the CSA, like cannabis, or their proceeds.1 A debtor need not be insolvent to file for bankruptcy, so long as the debtor files in good faith and for a legitimate bankruptcy purpose. Filing early will allow IH Companies to restructure, sell, or wind down lawfully using federal tools that are unavailable, or far weaker, under many state procedures or out-of-court workouts.
Key Advantages of Federal Bankruptcy Cases
Automatic stay and nationwide forum
One of the most powerful debtor protections in bankruptcy is the automatic stay. Effective from the moment a bankruptcy petition is filed, the automatic stay enjoins prepetition lawsuits and collection efforts by creditors, giving a debtor breathing room to stabilize its operations and address creditors’ claims in an orderly fashion. This is particularly important for IH Companies that operate in multiple jurisdictions, such as a hemp beverage distributor that transports its products across state lines. By filing for bankruptcy, the distributor creates a single federal forum for adjudicating claims and benefits from the automatic stay effective nationwide. By contrast, state restructuring or liquidation mechanisms, including assignments for the benefit of creditors (“ABCs”) and receiverships, provide no automatic stay, forcing debtors to seek localized injunctions and additional ancillary proceedings in other states. This increases cost and delay. Similarly, out‑of‑court workouts impose no stay at all, and stay relief depends on the voluntary forbearance of creditors, which is often hard to obtain.
DIP financing, cash collateral, and priming liens
For secured loans, collateral descriptions and valuations must address any legality issues tied to inventory or receivables, and may require excluding soon to be banned suspect collateral from the borrowing base. IH Companies facing the ban may need adjustments to their current financing schemes to fund payroll, stabilize supply chains, and run sale processes that maximize recovery. Under sections 363 and 364 of the Bankruptcy Code, a debtor can obtain court approval to use cash that is pledged to a lender (“cash collateral”) and receive new debtor-in-possession loans to be repaid first, with priority over existing loans (“DIP financing”). Debtors can structure DIP financing and cash collateral arrangements to avoid reliance on proceeds from any questionable activity, and to provide clear use‑of‑proceeds controls. By contrast, ABCs and receiverships depend on voluntary lender cooperation, often without priming authority. In workouts, distressed companies must persuade existing lenders to advance funds without the protections and controls that bankruptcy offers – a tall order when collateral values are uncertain.
Assumption, assignment, and rejection of contracts and leases
IH Companies should review contracts, leases, licenses, and approvals to determine how to comply with the ban where feasible. For example, landlords may invoke use restrictions; debtors should review lease covenants and cure strategies early. Distressed companies may seek to free themselves from non-compliant contracts, above‑market leases, and other onerous agreements that put a strain on the business. Debtors in federal bankruptcy cases have relatively broad rights under Section 365 of the Bankruptcy Code to assume, assume‑and‑assign, or reject certain burdensome contracts and unexpired leases, notwithstanding many anti‑assignment clauses. By contrast, ABCs, receiverships, and workouts provide no mechanism to bind non‑consenting counterparties to override anti‑assignment clauses; and obtaining dozens or hundreds of consents risks destroying value or derailing deals.
Sales that are free and clear of liens and maximize value
Sales of product lines or of substantially all assets may be conducted with speed and value maximization through a bankruptcy process. Section 363 of the Bankruptcy Code authorizes asset sales “free and clear” of liens and other interests if statutory conditions are met. Courts routinely approve sale procedures and auctions that generate the “highest and best” offers on expedited yet fair schedules. Buyers enjoy transparent auctions, clean title transfers, and limited successor liability risk, which supports higher bids and better recoveries. By contrast, receiverships offer varying but often limited “free and clear” sales, and ABCs cannot transfer assets “free and clear” without lienholder consent.
Claims adjudication process and avoidance powers
Bankruptcy provides a structured claims process with court oversight and a defined priority scheme. Trustees and debtors in possession can use their avoidance powers to pursue lawsuits against creditors that were paid prior to the bankruptcy case, recovering certain pre-petition expenditures and ensuring equality of distribution. These tools often enlarge estates and deter creditor “grab races.” By contrast, the remedies and reach-back periods available to ABC assignees lack the uniform power of federal avoidance provisions. Similarly, workouts afford no centralized claims adjudication and cannot compel equal treatment among similarly situated creditors.
Types of Bankruptcy Cases Available
Chapter 11: Reorganization. Equipped with the benefits described above, an IH Company in chapter 11 has a flexible platform to restructure by pivoting business lines, selling assets, or implementing a liquidating plan. It could use the tools available in chapter 11 to pivot its business to one with CSA-compliant revenue streams, such as non-intoxicating CBD within any new federal limits, or white‑label manufacturing of compliant inputs. Alternatively, chapter 11 could be used to initiate a court-supervised auction process to sell brands, IP, equipment, and other lawful assets free and clear of liens and claims, with stalking-horse bid protections that draw competition. And if a reorganized go‑forward business is not viable, an IH Company in chapter 11 could conduct a court‑approved liquidation and distributions to creditors, preserving more value than a free-for-all liquidation or piecemeal collapse outside of court.
Subchapter V: A Fast Track for Small Businesses. Qualifying small business debtors can leverage a faster, less expensive path to confirmation of a plan of reorganization or another exit from bankruptcy through subchapter V of chapter 11. To qualify, a business must have aggregate, noncontingent, liquidated debt that does not exceed the current debt cap of $3,424,000 and have at least 50% of that debt arising from commercial or business activities. This subchapter V process streamlines chapter 11 by accelerating timelines, reducing costs (no U.S. Trustee quarterly fees and usually no unsecured creditors’ committee), appointing a subchapter V trustee to facilitate a consensual plan, and eliminating the need for an impaired class to confirm a plan. The simplified confirmation process of subchapter V makes it realistic to file, stabilize, and confirm a plan within months – well before the one‑year grace period closes, making subchapter V a particularly attractive option for eligible businesses.
Chapter 7 Liquidations. Chapter 7 provides another avenue for an IH Company to conduct an in-court liquidation where it surrenders control to a court-appointed independent trustee responsible for liquidating quickly and distributing proceeds by statutory priority. This avenue may be better suited for IH Companies that cannot feasibly pivot or lack funding for chapter 11, or where rapid cessation and monetization of lawful assets will maximize recoveries.
Chapter 15: Recognition of Foreign Proceedings for Cross-Border Groups. Foreign parent companies with U.S. assets or affiliates – such as Canadian owners of IH Companies – can use chapter 15 of the Bankruptcy Code to have a U.S. bankruptcy court recognize and enforce one or more insolvency proceedings in a foreign jurisdiction. The bankruptcy court, subject to certain public policy limitations, can use recognition to stay U.S. lawsuits, protect assets, and help carry out sales or wind-downs in line with the foreign court’s orders, often without the cost and complexity of a full U.S. bankruptcy case. For IH Companies, chapter 15 can quickly stabilize the U.S. assets of a foreign insolvency proceeding and could even be paired with separate U.S. bankruptcy cases by subsidiaries, before the federal ban takes effect.
Conclusion
Absent federal legislative relief, the ban on intoxicating hemp products is set to take effect in less than a year. IH Companies, for now, can use the federal bankruptcy system to reorganize or liquidate their businesses while receiving critical protections and value-enhancing benefits that cannot be matched by state procedures and out-of-court workouts. Whether an IH Company could benefit from bankruptcy, and the type of bankruptcy that would be most appropriate, will depend upon the nature and operational characteristics of the particular business. IH Companies should consult with counsel to assess their options while bankruptcy remains one of them.
Law Clerk Zoe Sun contributed to this article.
1 To name a few, In re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. 2018), In re Arenas, 514 B.R. 887 (Bankr. D. Colo. 2014), and In re Arm Ventures, LLC, 564 B.R. 77 (Bankr. S.D. Fla. 2017).