Rx for Reefer No More.

California hit a much publicized milestone with the passage of Proposition 64, which sanctions the recreational use of marijuana. Heretofore, legitimate purchases in the state were limited to prescription based consumption.

State Legislation Affects Federal Bankruptcy Law 

High Times. But how the heck does this affect bankruptcy law of all things?  Before we answer, let us weed through some brief background on how changes to state law can impact bankruptcy. 

Although bankruptcy is a product of federal legislation, it intersects with state law. Thus, change in state law may have a ripple effect on bankruptcy: a federal procedure which provides for relief from debt, a powerful safety net from collections and seizures of property.

For example, section 541(a)(2) of the United States Code Title 11 (the “Bankruptcy Code”) provides that community property constitutes “bankruptcy estate” property. Thus, a person filing bankruptcy in a community property state like California must consider the effect upon community (marital) property interests even if they file a case without their spouse. And pursuant to section 522(b)(3)(A) of Title 11, exemption of property (exclusion from liquidation in chapter 7 bankruptcy) is determined by state legislation. Thus, California residents will look to the Golden State’s Code of Civil Procedure in assessing whether assets would be fully immune to creditor claims.

Similarly, the effects of legalization of cannabis can manifest in the bankruptcy process. This occurs in the context of scheduling the bankruptcy petitioner’s expenses.

Because Pot is a Consumer Expense, it May Decide Bankruptcy Eligibility

In a consumer bankruptcy case, the debtor must demonstrate lack of ability to repay debts. In preparing to file a voluntary bankruptcy petition, the debtor’s attorney will carefully examine his client’s projected income and expenses (which must be reasonable and necessary). The purpose is to ascertain whether there’s a shortfall of income or a surplus. In other words: is the debtor in the red or in the black ?

If they’re in the black by more than a nominal margin, they may not qualify for chapter 7 bankruptcy, a procedure in which debt is discharged within about 3 months.

They might alternatively opt to file chapter 13 bankruptcy , a 36- to 60-month payment plan, in which the disposable income (the budget surplus) is paid to creditors. The higher the disposable income, the higher the chapter 13 payment. In bankruptcy, you “want” to have less disposable income, which would result from claiming, ahem high expenses.

Thus, in order to qualify for chapter 7 or support a lower chapter 13 payment, the debtor must not minimize their anticipated expenses. This is where marijuana falls in. It’s a legitimate expense. But how do you schedule it? Therein lies the cannabis conundrum.

When you file bankruptcy, your lawyer will complete a sizable series of  schedules, statements and declarations . Among the set of schedules is Schedule J, which itemizes monthly expenses such as rent, food, utilities and transportation, which are unique to each debtor. There are a total of 35 expense and sub-expense categories to populate.

Among the expense categories (at lines 11 and 13 of Schedule J, respectively) are “medical/dental” (which applies to out-of-pocket health care) and “recreation” (which covers discretionary spending). It seems the Schedule J categorizations are tailor made to accommodate the two classifications of ganja.

If you consume a copious portion of pot, its cost (shown on Schedule J) can cancel out a considerable chunk of net income otherwise allocatable toward repayment of debt. But careful: to permit a proper offset of income, its itemization is of the essence. Whether you smoke, vape or munch medically (at line 11) or for kicks (at line 13) may materially affect the bankruptcy.

The scheduled recreation expense must be minimal. The consumer bankruptcy petitioner is prodded to tighten her belt and not indulge. But there isn’t a stringent cap upon documented medical or health care costs. Thus, a heavy consumer of medicinal marijuana may better qualify for chapter 7 bankruptcy than her recreational-user counterpart. Alternatively, in chapter 13 bankruptcy, the pot patient could support a lower payment plan than the recreational buyer.

Filing Bankruptcy: For Marijuana Users and Abstainers Alike

The above scenario exemplifies some of the unexpected nuance involved in the preparation of a bankruptcy petition. If you’re in heavy debt and need to file, then retain a specialist who appreciates all facets of state and federal law found in this niche legal field. Having prepared over 700 successful chapter 7 and 13 bankruptcies, San Diego-based attorney Asaph Abrams delivers the high level experience that clients deserve. He provides personalized representation, which is lacking among corporate bankruptcy mills and national firms that engage in assembly-line legal “service.” 


Photo credit: Evan-Amos

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