The answer is that Klal Yisrael’s mesorah says he will be from the living, even if it once was a theoretical possibility as debated in the gemara.
And even if it were possible, it would be, as the gemara notes, Rabbeinu HaKadosh or Daniel (the Navi), not Chabad’s deceased leader.
Coffee:
It very well involve serious aveiros, not just a “shtus” to believe that Chabad’s deceased leader is Mashiach.
We have a mesorah that Mashiach will come from the living. They can’t claim that they know better; doing that is essentially throwing out all of Torah sheBaal Peh. If you can argue against all the chachmei haMesorah for thousands of years, then you could just make a new religion, which is what they are unfortunately slowly doing.