By Ryan C. Wood

The question of whether a creditor is a considered an “insider” in a bankruptcy case is an important distinction. When you repay one creditor and not others, it is considered a “preference” because you are providing special treatment to a single creditor.  All creditors of the same priority need to be treated equally under bankruptcy law.  Therefore, when you pay one person or one entity and not others, the bankruptcy trustee has the right to avoid that transaction and bring the money back into your bankruptcy estate so that all your creditors will be paid a percentage. If a creditor is an “insider” and you paid them all or a portion of the debt within one year prior to filing for bankruptcy, the bankruptcy trustee may avoid the transaction as a preference under 11 U.S.C. §547(b).  The preference period for a normal creditor (like credit card companies) is 90 days versus one year for an insider, because insiders are more closely scrutinized.

If you have repaid a creditor a significant amount of money before your bankruptcy case is filed it is important to find out if they are considered insiders and talk to your bankruptcy lawyer about the payment in detail.  11 U.S.C. §101(30) defines an “insider” to include a relative of the debtor or a general partner of the debtor.  11 U.S.C. §101(45) defines “relative” to mean an individual related by affinity or consanguinity within the third degree as determined by the common law, or individual in a step or adoptive relationship within such third degree.  This means that if you borrowed money from your sister, she is considered to be one of your creditors.  If you repaid your sister $10,000 six months before you file for bankruptcy, the trustee could avoid that transfer and sue your sister to bring the $10,000 back into the bankruptcy estate.

What if the relationship is a little unclear?  What if you borrowed money from your “Aunt” Margaret who is a close family friend (but not relative) and has known you your entire life and would do anything to help you in your current situation?  In addition to looking at the family ties, courts have also looked at whether there is a close enough relationship between you and the creditor (“Aunt” Margaret in this scenario) that your conduct should be scrutinized at more than regular arms length transactions.  The courts look at whether the creditor would have any influence over you or exert any control over the situation.  If the creditor does have control over you it is not considered to be an arms length transaction and the creditor would be defined as an “insider.”  Some other factors that may be looked at to determine whether the creditor is an “insider” includes whether there was a written contract, whether any interest is being included in the debt and whether the creditor has any advantages based on the relationship.  All these factors point to whether the transaction was made at arm’s length.  If the transaction was made at arm’s length then the creditor is subjected to the regular 90 day preference period.  If it was not at arm’s length then the creditor is treated as an insider who is subjected to the one year preference period.

If you have any questions regarding potential preferential payments, contact an experienced Fremont bankruptcy attorney or Oakland bankruptcy attorney today at 877-9NEW-LIFE or 877-963-9543.  You may also go to www.Fremont-Bankruptcy-Attorney.com for more information.