United States bankruptcy law identifies a category of persons known as “insiders.” Typically, an “insider” for bankruptcy purposes is a family member or a close personal friend to the person filing bankruptcy. In cases where a business is involved, an “insider” may also be a close business associate or partner.
Persons potentially filing bankruptcy should avoid insider transactions which actually provide or appear to provide special or “preferential” treatment to insiders who are also creditors. Giving better treatment to creditors who are insiders is considered unjust to other creditors. Such preferences can draw objections both from trustees and creditors themselves.
Debtors filing bankruptcy are routinely asked to disclose under oath and penalty of perjury any pre-bankruptcy transactions with insiders. These disclosures are required both in the schedules and related documents filed with the Bankruptcy Court and under examination by trustees appointed to administer a bankruptcy case.
Examples of preferential treatment of an insider over other creditors includes (but is not limited to):
- Paying off a significant debt owed to an insider just prior to filing bankruptcy while other debts go unpaid
- Failing or refusing to list a debt owed to an insider on the required bankruptcy schedules
- Providing belated collateral or security for a debt owed to an insider which was not part of the original transaction
- Not listing money owed to you by an insider as an asset of your case
- Failing or refusing to disclose payments to an insider close in time to filing bankruptcy
A Few More Tips on Insider Payments Before Filing Bankruptcy
While it is understandable that a person might want to give better treatment to family members or friends who have helped them in times of need, there are definite consequences to improperly preferring insiders over other creditors. Among other things, the Bankruptcy Court may compel the insider to return or “disgorge” money they were paid. Such funds would be used for a more equitable distribution among all creditors. More extreme consequences can include dismissal of your case or denial of your bankruptcy discharge.
If you have concerns about an insider transaction and how it might impact you when filing bankruptcy, you should schedule an appointment with an experienced bankruptcy attorney. At RGG Law, any initial consultation regarding a potential bankruptcy is free and without obligation.