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If your income is derived from a marijuana or cannabis-focused business, your options for Chapter 7 or Chapter 13 bankruptcy in Michigan will be limited.
Filing bankruptcy with income or debt earned from the marijuana or cannabis business is tricky. On one hand, such business is now legal under Michigan law. On the other hand, marijuana and cannabis remain regulated as a Schedule I drug.
That is, the marijuana business remains illegal under Federal law.
Bankruptcy is a Federal legal process. It is not a legal process governed by Michigan State law.
Thus, obtaining debt relief when you are engaged in a locally legal but Federally illegal business is complicated.
This Article will attempt to dissect some of the issues involved in filing bankruptcy in Michigan when at least part of your income and perhaps some of your debt arises from the marijuana or cannabis business.
It is important to note that this Article will emphasize the issues related to the marijuana business as they relate to individual, human consumers seeking debt relief through Chapter 7 and Chapter 13 bankruptcy in Michigan.
The issues related to cannabis and marijuana businesses filing Chapter 11 bankruptcy are, except when general rules are discussed, outside the scope of this Article.
First, some consumer bankruptcy basics to lay the groundwork for discussion follow.
Bankruptcy, Income, and Debt: A Quick Review
Income and its sources are very important components of the bankruptcy process.
To begin with, household income is averaged in the Means Test that determines whether or not you are eligible for Chapter 7 bankruptcy at all.
That Means Test household income average is also used within the Chapter 13 process to determine whether you are eligible to file just a 3-year Chapter 13 payment plan or whether you must file a 5-year payment plan. In Chapter 13 bankruptcies, the Means Test income average also determines whether or not your unsecured creditors must be paid some minimum amount of money through the Chapter 13 plan.
All sources of income earned within the 6 months prior to the month in which the bankruptcy is filed must be disclosed.
Income and its source is especially important outside of the Means Test in Chapter 13 bankruptcies. In a Chapter 13 bankruptcy process, you make a monthly payment to the Chapter 13 Trustee assigned to your case for 3-5 years. The Trustee takes that payment and distributes it to your creditors (and your bankruptcy attorney).
The question of how much you pay each month to your Chapter 13 Trustee is entirely depending upon what you earn—and where you earn it.
Further, all debts owed must be disclosed in your bankruptcy petition. This includes $10 owed to your grandmother just as it does $1 million owed to a hospital or bank. Regardless of whether any “paper” is involved in the agreement to borrow and repay the funds.
Underlying the entire bankruptcy process is the purpose of bankruptcy itself: to provide debt relief to “good faith” or “honest” debtors.
Finally, remember, again: Bankruptcy is a Federal legal process. What is an “honest” source of income under Federal is, as of this writing, different than “honest” sources of income under Michigan state law where marijuana and cannabis are concerned.
Marijuana Business Income: Illegal Under Federal Law
The impact of the classification of marijuana as a Federal Controlled Substance upon the bankruptcy process is great.
The result of this classification is the designation of all activities related to the growing, cultivating, manufacture, distribution, and sale of marijuana- and cannabis-based products is the designation of such activities as “illegal” or “criminal.”
The bankruptcy process in Michigan and elsewhere unfolds within the Federal Court system. Federal Bankruptcy Court judicial and administrative staff work each bankruptcy case to conclusion. A division of the US Department of Justice known as the US Trustee’s Office acts as watchdog over the “integrity” of the Federal Bankruptcy process.
The Chapter 7 and Chapter 13 Trustees are, in fact, chartered by this US Trustee’s Office and by the US Trustee running that Office. (Detroit and Grand Rapids and the other divisions of the Federal Judiciary system house local US Trustee’s Office, staffed by a supervising Assistant US Trustee and other Assistant US Trustee staff attorneys and personnel.)
Federal employees may not facilitate activities or receive the proceeds of activities that are deemed illegal under Federal law.
The US Trustee’s Letter Regarding Marijuana Assets
In a Chapter 7 bankruptcy, assets are also a vital consideration. Since you do not repay any of your creditors in a Chapter 7 as you do in a Chapter 13, your creditors are only repaid anything at all if you have assets that are subject to seizure and liquidation by the Chapter 7 Trustee assigned to your case.
Most people who file Chapter 7 bankruptcies in Metro Detroit do not lose any property at all. Most people’s property is “exempted” from liquidation. How this happens is outside of the scope of this Article, however.
What is important with regard to marijuana and cannabis-related business or employment is an understanding that all property, including and debts owed to the filing debtor, are all “assets” subject to theoretical liquidation.
Federal employees may not facilitate the liquidation of cash or property derived from a Federally illegal marijuana business.
To clarify this, the US Trustee’s Office, in 2017, issued a letter to all Chapter 7 and Chapter 13 Trustees and Assistant US Trustees in the United States.
This letter stated, in particular, that the goal of the US Trustee’s Office is …
… to ensure that trustees are not placed in the untenable position of violating federal law by liquidating, receiving proceeds from, or in any way administering marijuana assets. In some cases, trustees move to dismiss or object to a chapter 13 plan confirmation on grounds unrelated to the controlled substance. You should continue to file any motions or objections you deem appropriate. It is the policy of the United States Trustee Program that United States Trustees shall move to dismiss or object in all cases involving marijuana assets on grounds that such assets may not be administered under the Bankruptcy Code even if trustees or other parties object on the same or different grounds.
In short, any case involving “marijuana assets” are to be dismissed.
The US Trustee’s Office further explained its point of view in a short, explanatory article posted on its website.
In this article, the US Trustee noted that the Federal Controlled Substances Act (CSA) prohibits knowingly renting, managing, or using property for the purpose of manufacturing, distributing, or using any controlled substance. The US Trustee pointed out that the CSA does not distinguish between sellers or growers or downstream participants in the marijuana or cannabis trade. Additionally, the US Trustee argued that the CSA further criminalizes the manufacture or sale of any equipment or other paraphernalia utilized in the marijuana trade.
Accordingly, the US Trustee will not make or enforce any policy contrary to its reading of the Controlled Substances Act.
What Does This Mean for Michigan Marijuana Industry Business Owners or Employees?
The US Trustee’s Letter makes it clear that Detroit-area and Grand Rapids-area Assistant US Trustees, Chapter 7 Trustee, and Chapter 13 Trustees have the discretion to decide whether to move to dismiss a bankruptcy case pursuant to its policy.
However, there is no particular reason to believe, here in the Eastern District of Michigan, at this time, that dismissal will not be a consequence of filing a bankruptcy case if marijuana or cannabis-related income or assets are at issue in the case.
If your income is derived from a marijuana or cannabis-focused business, your options for Chapter 7 or Chapter 13 bankruptcy in Michigan will be limited.
This will be true even if you are merely the cashier at a legal, state-regulated dispensary.
At the very least, if you need Chapter 7 or Chapter 13 debt relief, you will need to consult a highly experienced Michigan bankruptcy attorney to review all of your options with you.
For example, your bankruptcy lawyer may discuss, if you are a mere “downstream” employee, whether it is possible for you to find new employment in a different industry and select a filing-date strategically.
However, if you own assets related to the operation of a marijuana business or have purchased assets with income derived from marijuana business operation, the issue will not fade away simply with a change in employment.
Non-Bankruptcy Alternatives for Marijuana Industry Participants
One option your Michigan attorney will discuss with you, potentially, are alternatives to the bankruptcy process for debt relief.
These non-bankruptcy alternatives may include negotiated settlements with creditors, voluntary asset liquidations, debt repayment installment plan negotiations, and more.
The ultimate goal will be to preserve your income, avoid garnishment, and obtain a fixed timeframe for the payoff or discharge of your debt, in or out of the bankruptcy process.
Many bankruptcy attorneys offer legal services such as these as well as bankruptcy services.
Marijuana and Michigan Bankruptcy: The Bottom Line
The bottom line is that, if your income or assets are derived in any way or to any extent from the production or sale of marijuana products, you should not attempt to file bankruptcy on your own, without expert help.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented thousands of Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.
If you are considering filing for bankruptcy in Eastern Michigan, contact us now to schedule your free, initial consultation.
