While an increasing number of states have legalized medical and recreational marijuana, not all marijuana-related businesses are successful. When marijuana dispensaries and marijuana users file for bankruptcy, they may encounter a difficult situation: How do they to claim marijuana as an asset? 

What Happens If I Possess Marijuana While Filing for Bankruptcy?

Unfortunately, federal law governs bankruptcy. Bankruptcy judges have the legal duty to uphold federal law, including the Controlled Substances Act, the federal statute that forbids marijuana possession. Debtors will face different consequences depending on what type of bankruptcy they filed for:

  • Chapter 7 – Debtors are required to disclose that they possess marijuana. Failure to do so will result in their case being dismissed. However, if debtors do disclose marijuana possession, they risk federal and/or state prosecution.
  • Chapter 12 – Chapter 13 requires debtors file a plan which is not forbidden by law. If the plan involves marijuana, the plan might not be confirmed. Debtors will either be dismissed or have their case converted into Chapter 7.
  • Chapter 13 – Chapter 13 requires debtors file a plan which is not forbidden by law. The plan must also be feasible. This means that the plan must have a chance of succeeding. If the marijuana is seized by federal authorities, then the plan doesn’t have much a chance. 
  • Chapter 11 – Like Chapter 13, Chapter 11 requires debtors file a plan which is not forbidden by law. In Chapter 11, the case can be dismissed, converted into Chapter 7, or the debtor loses possession of the business.
    If a debtor has his or her case dismissed, the case stops wherever the debtor was during the bankruptcy process.

Since discharge is typically granted at the end of the case, debtors who have their case dismissed will still have their debts. However, the debtor will still lose any assets sold during Chapter 7 or any income given during Chapter 12 or 13. Even worse, the debtor might have given the government a reason to file criminal charges.

What If My State Has Legalized My Marijuana Possession?

An increasing number of states have legalized certain types of marijuana distribution and possession. Currently, eight states (and the District of Columbia) permit recreational marijuana use. 44 states have medical marijuana programs. However, not all businesses are successful—and some marijuana businesses have attempted to file for bankruptcy.

Unfortunately, federal drug laws trump a state’s legalization of marijuana. Bankruptcy judges and trustees are federal employees who are sworn to uphold all federal laws.  For this reason, the Department of Justice typically dismisses bankruptcy petitions for marijuana businesses.

Why Would My Creditors Try to Have My Case Dismissed?

If the judge finds against the debtor, the marijuana is subject to civil forfeiture or confiscation. If the marijuana is seized, the creditors won’t get any money from that seizure. Neither creditors nor the creditors’ trustee would jeopardize the creditors’ chances of repayment.

The problem with marijuana in bankruptcy is not the creditors or the creditors’ trustee. The problem will be the United States Trustee’s Office. The US Trustee’s Office is the arm of the federal Justice Department tasked with enforcing federal policy in bankruptcy. If a debtor tries to move marijuana through bankruptcy, there is a very good chance that the US Trustee Office’s will be watching. If they don’t like what they see, they will intervene and ask the judge to dismiss the case.

I’m In Chapter 7 Bankruptcy. What If I Don’t Disclose My Marijuana Possession?

The Bankruptcy Code only allows the judge to deny discharge for a specific number of reasons. Unlike Chapter 11, Chapter 12, or Chapter 13, Chapter 7 does not require that the debtor comply with certain laws to remain in the case. However, Chapter 7 does require the debtor be completely honest.

Debtors in possession of marijuana during Chapter 7 bankruptcy have a choice. They can plead the Fifth Amendment and be denied discharge, or admit to marijuana possession and make it easier to receive a discharge. The downside with disclosure is that you run the risk of federal and/or state prosecution. Since bankruptcy is a public process (the debtor must swear to tell the truth), the debtor would also be giving prosecutors evidence to use against him or her.
Bear in mind that the automatic stay will not halt the prosecution of any charges brought against the debtor. The automatic stay does not apply to government exercise of police powers.

Why Is Chapter 12 an Option?

Chapter 12 bankruptcy is bankruptcy for family farmers and fishermen. Traditionally, this has limited the use of Chapter 12 to a select number of people. Since marijuana cultivation is essentially farming, some marijuana businesses turned to Chapter 12 as an alternative to Chapter 13 bankruptcy. The main advantage of using Chapter 12 over Chapter 13 is that the cap on debts in Chapter 12 are higher than the cap on debts in Chapter 13, allowing the debtor to pay off and discharge more debt. However, a federal judge can still dismiss a marijuana-related Chapter 12 filing due the illegality of the business.

Are There Any Defenses to Bankruptcy Dismissal If I Possess Marijuana?

There are a few defense theories, although this is a relatively new issue in bankruptcy law. . As a result, these defenses are mostly untested:

  • Jurisdiction – arguing that courts are not criminal courts and it would violate the Constitution to dismiss a case before a jury convicts a debtor of marijuana possession.
  • Plan proposal – arguing that the Bankruptcy Code only requires that the plan proposal is permitted under federal law. The plan itself need not be subject to that requirement.
  • Not forbidden by law – arguing that the "law" required is the Bankruptcy Code only, and not other federal laws, like the Controlled Substances Act.
  • Double jeopardy – the argument is that bankruptcy dismissal would be a punishment and the Constitution prohibits more than one punishment for the same crime.

Should I Contact a Lawyer?

Bankruptcy is a complex field of law that most people have no experience with. The bankruptcy process is even more complicated when the threat of prosecution is hanging over your head. The Justice Department will have an army of lawyers on their side. We strongly advise that you have an experienced bankruptcy lawyer or criminal defense attorney by your side.