The bankruptcy code defines an insider as either a relative, a relative of a general partner, a general partner of the person filing bankruptcy or a corporation in which the person filing bankruptcy is an officer, director or personal in control. When filing bankruptcy you must answer whether you have made a payment on any debt owed to an insider within the last 12 months of filing bankruptcy. The trustee will ask you this question, under oath, at your 341 hearing.
Why does the trustee care whether I have repaid an insider money within the last year?
The bankruptcy code requires that all of your creditors be treated fairly and equally, including insiders. Normally, this scenario is more of a problem around tax season because people feel obligated to repay their family when they get their tax returns. If you are considering bankruptcy, repaying a relative or other insider a large sum of money within one year of filing bankruptcy may be a bad idea. It is important that you disclose this payment to your bankruptcy attorney before filing bankruptcy. You are also required to disclose any such payment within your bankruptcy petition.
Chapter 7 Trustee
The chapter 7 trustee can file an adversary proceeding to attempt to get the money back that you paid to an insider (as a preferential transfer), and distribute the money to all of your creditors. If an adversary proceeding is filed, that action will be between the trustee and the insider. In some cases, you may be able to reach a settlement with the chapter 7 trustee to avoid her from filing an adversary proceeding against the insider. For example, if you repaid Dad $5,000 within one year of filing bankruptcy and the chapter 7 trustee has indicated she will be going after that money as a preferential transfer, you may be able to offer to pay the chapter 7 trustee a lump sum directly instead of having her file an adversary proceeding against your Dad.
Chapter 13 Trustee
The chapter 13 trustee will require that you pay your unsecured creditors in your plan the same amount that you paid to insider(s) within one year of filing bankruptcy. For example, if you repaid Mom $1,500 four months ago and are now filing bankruptcy, the chapter 13 trustee will require that you pay at least $1,500 to your unsecured creditors in your bankruptcy plan. Also, the chapter 13 trustee will require that you and the insider sign a waiver, waiving the timing of when a trustee can bring an adversary proceeding to retrieve the preferential transfer. This protects the chapter 7 trustee’s right to bring the adversary proceeding, if you decide to convert your chapter 13 to chapter 7 at a later date.
Mary Pool is a shareholder of the Bond & Botes Law Offices in Montgomery and Opelika, Alabama. She holds a Bachelor of Science from Auburn University at Montgomery, and a Juris Doctorate from Faulkner University’s Jones School of Law. She has represented thousands of clients over her more than 11 years working in the bankruptcy field. Read her full bio here.