Sheehan & Associates, P.L.C.

Can debtors with marijuana income find bankruptcy relief?

There are a lot of people who see the national legalization of marijuana as all-but-inevitable. In the meantime, however, there's a standoff between the states that have legalized marijuana use in one form or another and the Department of Justice, which is obligated to treat all marijuana use and business of any kind as a federal crime. This sometimes creates conflicts of the law in surprising areas, like bankruptcy court.

Can a debtor whose income is derived either solely or partially from a marijuana-related business be entitled to federal bankruptcy relief?

According to some judges, no. At least three cases have seen bankruptcy court judges decline to give individuals and businesses any bankruptcy protection. However, attorneys say that a close examination of the rulings indicates that there actually are opportunities and strategies that can be employed that could give debtors relief.

In all three cases that are being used as precedents, the judges admitted that their decisions were based on the discretion granted to them under the Bankruptcy Relief Code. That indicates that bankruptcy relief may be available if the judge and trustee take a different interpretation of their responsibilities under the Code.

In one of the cases, the only thing at issue was the marijuana-related assets. The trustee felt that having to administer them would put him in violation of federal laws. That indicates that if there are no marijuana-related assets for a trustee to administer that there might not be an issue and the debtor would be able to receive relief.

In practical terms, what does this mean for debtors who derive income from marijuana or have marijuana-related assets? Debtors with these concerns should start consultation with a bankruptcy attorney early, as soon as the possibility of bankruptcy becomes an idea. With careful planning, it may be possible to dispose of any marijuana-related assets and income early enough prior to filing the bankruptcy petition to avoid triggering issues with the trustee or judge.

Finally, it's important to touch base with a bankruptcy attorney who is familiar with the local courts. As marijuana laws broaden across the U.S. and the public acceptance of marijuana use increases, it may make judges reluctant to deny relief to a growing part of the local economy.

Source: Lexology, "Up in Smoke: Why Marijuana Companies Can't File Bankruptcy and How That Could Change," Wilk Auslander LLP, Dec. 05, 2016

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