Bankruptcy is typically initiated when a person or business cannot meet their financial obligations. Through the process of bankruptcy debtors will liquidate their assets or restructure their finances to fund or eliminate their debts. It is important to note that there are different types of bankruptcy, which are defined and governed under federal law. Consumer bankruptcy is filed when an individual cannot pay back their debts that they have incurred for their personal needs.
Once the consumer bankruptcy proceeding is complete, the debtor would no longer be liable for the debts that they incurred, minus certain debts that may not be discharged. At the completion of the proceedings, the bankruptcy court will enter a discharge order that releases the debtor from their debts, thus giving the debtor a clean financial slate.
However, the bankruptcy itself will remain on their credit report for up to ten years. Additionally, filing for bankruptcy can have other lasting consequences. As such bankruptcy should only be used as a last resort during times of extreme financial hardship.
What Are the Different Types of Bankruptcy?
As mentioned above, there are three different types of bankruptcy: Chapter 7, 11, and 13. Chapter 7 Bankruptcy, also commonly referred to as “liquidation bankruptcy,” allows an individual to discharge all of their debts that can be legally discharged. However, there are specific rules in terms of who can qualify and file for Chapter 7 bankruptcy, as well as what type of debts can be discharged.
In order to be eligible to file for a Chapter 7 bankruptcy, a debtor’s income must be equal to or below the median income in their state. This means that each state has different income requirements. If the debtor’s income is above the requirement for that state, the court will apply a “means test” based on the previous six months of income. Therefore, if the debtor has the means to repay their debts, they will likely not be considered to be eligible to file for Chapter 7 bankruptcy.
Once a person initiates a Chapter 7 bankruptcy filing, the court will issue an automatic stay, which will prevent creditors from attempting to collect on their debts. Automatic stays also serve to prevent or pause any:
- Pending lawsuits against the filer;
- Wage garnishments;
- Filing of liens against the filer; or
- Seizure of the filer’s property.
Chapter 13 Bankruptcy, also commonly referred to as “wage earner’s bankruptcy,” is a way for a debtor to restructure their debts and still be able to afford payments. This form of bankruptcy is generally reserved for those who have higher incomes, and also wish to keep their property intact. Under Chapter 13 bankruptcy some debts may be eligible for discharge, while others may require payment in full through a payment plan, such as between three and five years.
An individual is eligible for a Chapter 13 bankruptcy filing if they meet the following requirements:
- They’re an individual or married couple;
- As of April 2022, Their total secured debts are equal to or less than $1,395,875.00;
- As of April 2022, their total secured debts are equal to or below $465,275;
- They have not had a bankruptcy petition dismissed within the last 180 days due to failure to appear or comply with the bankruptcy court; and
- They receive credit counseling through an approved counselor within 180 days from the date that their petition is filed.
Chapter 13 bankruptcy differs from Chapter 7 bankruptcy in that the borrower attempts to keep most of their property, and is required to continue to make payments. Similar to Chapter 7, Chapter 13 bankruptcy can also affect an individual’s credit for up to ten years after filing. Finally, during the Chapter 13 bankruptcy payment plan process, the borrower must also adhere to a strict budget without lines of credit. For this reason, many borrowers tend to drop out of the payment plan.
Chapter 11, also known as “reorganization bankruptcy,” is a type of bankruptcy that is available to individuals, corporations, and partnerships. With Chapter 11 bankruptcy, there are no limits on the amount of debts. As such, this form of bankruptcy is the most common choice for large businesses who are seeking to restructure their debts in order to become profitable again. This is also why Chapter 11 bankruptcy is considered to be the most flexible of all the bankruptcy chapters. However, Chapter 11 bankruptcy is generally more expensive to the debtors than the other chapters. Further, the rate of successful business reorganizations is generally very low.
As Chapter 11 is business oriented, Chapter 11 bankruptcy allows a debtor business to reorganize its finances in order to eventually pay off its debts, and continue operating once the bankruptcy process is complete. The Chapter 11 bankruptcy process is initiated when a business files a petition for Chapter 11 with the bankruptcy court. Then the business is given 120 days to create a plan to reorganize the business in a profitable way.
What Happens If I Possess Marijuana While Filing for Bankruptcy?
Once again, federal law governs bankruptcy. This means that bankruptcy judges have the legal duty to uphold federal law, including the Controlled Substances Act. The controlled substances act is the federal statute that forbids marijuana possession. As such, debtors will face different consequences for the possession of marijuana while filing for bankruptcy, dependent on what type of bankruptcy they filed for:
- Chapter 7: It is important to note that debtors are required to disclose whether or not they possess or use marijuana during a bankruptcy proceeding. Failure to disclose possession will result in their bankruptcy case being dismissed. However, if debtors do disclose marijuana possession, they then risk federal and/or state prosecution;
- Chapter 11: Chapter 11 bankruptcy requires debtors to file a reorganization plan which is not forbidden by law. In Chapter 11 bankruptcy cases, possession of marijuana can result in the case being dismissed, the case being converted into Chapter 7 filing, or the debtor losing possession of their business. If a Chapter 11 filer has their case dismissed, the case stops wherever the debtor was at during the bankruptcy process; and
- Chapter 13: Similar to Chapter 11, Chapter 13 requires debtors to file a plan which is not forbidden by law. Additionally, the plan for repayment and reorganization of the debts must also be feasible. Thus, if the filer’s marijuana is seized by federal authorities, then their plan is not likely feasible.
It is important to note again that discharge is typically granted at the end of the case. This means that debtors who have their case dismissed during the bankruptcy process will still have their debts. Additionally, the debtor will still lose any of their assets that were sold during Chapter 7, or any income paid during a Chapter 11 or 13 bankruptcy. Finally, a debtor also runs the risk of facing criminal charges from the federal government for possession of marijuana.
What if Marijuana Possession Is Legal in the State of Filing?
Although an increasing number of states have legalized the possession of marijuana, federal drug laws trump a state’s legalization of marijuana. As such, it is important to recognize that if you are an individual that is in possession of marijuana, even in a state where such possession is legal, your petition for bankruptcy may still be denied by the bankruptcy court.
Additionally, if you are a marijuana business seeking to file bankruptcy, your reorganization plan will likely be found to be forbidden by federal law. Typically, if a marijuana business seeks to file bankruptcy, their petition for bankruptcy will be dismissed by the bankruptcy court of the Department of Justice (“DOJ”).
Is Chapter 12 Bankruptcy an Option?
Chapter 12 bankruptcy is bankruptcy reserved for family farmers and fishermen. Since marijuana cultivation is essentially farming, some marijuana businesses turned to Chapter 12 as a means for seeking bankruptcy relief. The main advantage of using Chapter 12 over Chapter 13 is that the debts in Chapter 12 are higher than that of Chapter 13, which allow the debtor to pay off and discharge more debt. However, even in Chapter 12 bases, a federal judge may still dismiss the bankruptcy case if it is marijuana-related, due the federal illegality of the business.
Do I Need a Lawyer for Help with Marijuana Possession During Bankruptcy?
As can be seen, filing for bankruptcy is often a complicated process on its own. Adding marijuana possession during bankruptcy adds an extra layer of complications, as then the filer would have the threat of federal prosecution looming.
As such, if you possess marijuana during bankruptcy, it is important that you consult with an experienced drug lawyer prior to seeking bankruptcy. An attorney will also be able to assist you if you have already filed for bankruptcy. Finally, an attorney will be able to represent you at any court proceeding.