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Transferring assets before filing for bankruptcy

Virginia residents considering bankruptcy should understand exactly how the legal process works. There are a variety of rules, including a bar against certain transfers of assets within one year of filing a petition.

In a case that reached the U.S. court of Appeals for the 9th Circuit earlier in 2016, the bankruptcy petitioner, a dentist, had filed for Chapter 13 bankruptcy after being sued by a patient for malpractice. After filing, the dentist transferred ownership of a condominium to a trust using a quit-claim deed. After his first two Chapter 13 cases were dismissed and more than a year after the recording of the quit-claim deed, the dentist then filed under Chapter 7.

The plaintiff in the malpractice suit, now a claimant, filed a challenge to deny the dentist's bankruptcy discharge under Sec. 727(a)(2) of the Bankruptcy Code stating that the transfer of the condominium was an attempt to defraud and hinder creditors. In response, the dentist asserted that because Sec. 727(a)(2) requires that the transfer should be made within one year before a bankruptcy petition is submitted, the transfer of the condominium should not prohibit his bankruptcy discharge.

The bankruptcy court sided with the dentist, granting him a summary judgment. The malpractice plaintiff then appealed the decision, asserting that the one-year period is subject to equitable tolling because of the dentist's first two bankruptcy cases. The 9th Circuit determined that Sec. 727(a)(2) was not a statute of limitations and thus was not subject to tolling.

Bankruptcy is a legal procedure that an individual can use to obtain relief from overwhelming debt and get a fresh financial start. Not everyone qualifies, however, and some actions taken in advance of filing can have an adverse effect on the result. Having an attorney's help can be advisable for those who are interested in pursuing this course.

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