Paying an Insider Before Filing for Bankruptcy? Watch Out…

In bankruptcy, all creditors are supposed to be treated equally. The debtor, presumably, has limited if any resources or assets, and it is up to the court to make sure that all creditors get whatever the debtor has, equally (or at least, in whatever way the law says that the debtor’s assets should be distributed to creditors).

Preferential Payments

This is why you are not allowed to just pay a creditor more than you normally would within 90 days before filing for bankruptcy. But that 90 day limit expands to 1 year if the preferential payment is made to what is known as an insider.

But what is an insider? The bankruptcy code calls an insider anybody that is a relative of the debtor, a general partner, or a company that the debtor directs or is in control of. As you can imagine, the bankruptcy code is strict about insiders, because it would be easy for a debtor to pay, say, a relative, because of the personal relationship between the debtor and a relative.

But the bankruptcy code wants your relatives and other creditors treated the same. It is unfair for your mom, general partner, or son to get a payment from you in full, while your other creditors are left with little or nothing in the bankruptcy.

What is an Insider?

But bankruptcy courts have expanded the definition of what an insider is to go beyond just the list that’s in the code. In one case, a debtor paid back a loan to a boyfriend, before filing for bankruptcy. Because boyfriends or girlfriends are not specifically listed as insiders in the bankruptcy laws, the debtor argued that her payment could not be considered an insider preferential payment.

The court agreed, but the creditor appealed. On appeal, the appellate court said that the “label” of boyfriend or relative didn’t matter. The court said that what mattered is whether the relationship between the two was “like” a familial relationship, and whether the loan was an arms-length transaction (that is, an actual, legitimate loan).

Boyfriend Wasn’t an Insider

It turned out that the couple did not hold themselves out as married, did not intermingle their money, and did not live together. They had no traditional indicators of husband and wife. They did not hold themselves out as or act as if they were family.

The court also found that the loan was legitimate, even though it wasn’t in writing. There was an expectation that the loan would be repaid, a promise to repay, and amounts loaned and repaid were documented.

Because of this, the court said that the boyfriend was not an insider, and thus, the 90 day window, and not the extended 1 year window to undo or claw back preferential payments, would apply.

However, insider transactions can be case and fact-specific and can end up challenged by creditors. Make sure you have an attorney to help you with your bankruptcy to avoid these kinds of problems. Call the West Palm Beach bankruptcy lawyers at Kelley Kaplan & Eller at 561-264-6850. Let our bankruptcy attorneys help and advise you in your bankruptcy case.

Resource:

casetext.com/case/miller-v-sandell-in-re-torpey