Is Cousin Ted an Insider?

Submitted by Jen Jones on Mon, 08/17/2009 - 3:52pm

Is Cousin Ted an Insider?

It's generally not good practice to pay unsecured creditors just before filing bankruptcy. This is especially true if you plan on paying back a friend or relative. This means that if you're considering a bankruptcy, you shouldn't repay your Cousin Ted that $1,000 you owe him from vacation last year. A repayment constitutes preferential treatment of an unsecured creditor, and if you then file for bankruptcy, the Trustee will sue Cousin Ted to recover the $1,000.00

If this happened to you, don't beat yourself up about it, it's one of the more common pre-filing mistakes. It's completely understandable that a good portion of your financial guilt stems from not being able to get square with friends and relatives. However, you need to make sure you don't do it again, because it can make things quite a bit worse, especially for your favored insider.

Wait, what's an "insider?" That sounds underhanded...

Basically, an insider is a person who is close enough to you for the court to be swayed into believing they have a strong enough influence over you to impact payment decisions. Insiders are not automatic and are determined on a case-by-case basis. If a person is found to be an insider, the trustee can retrieve preferential transfers from them as far back as a year before bankruptcy.

Ex-spouses can sometimes be considered insiders, provided you two are still on speaking terms. But if things are bad enough between you, he or she may be begging to be labeled an insider. As you can see, this is one component of preferential transfers than can get pretty sticky.

Here is a quick breakdown of the type of payments that are not preferential:

  • Small payments: Payments less than $600 to a single creditor within the defining time period, typically 90 days or up to a year if involving an insider.
  • Payments on secured debts: Car and house payments are not preferential, because you are obligated to pay them as secured debts.
  • Current expenses: You are not going to get in trouble for paying your current bills and other monthly obligations. Be somewhat careful here, though, as back rent could be considered preferential. Talk to your attorney about this and all payments you have made prior to filing.
  • Overdue alimony or child support: These payments also need to be made and can't be recollected by a trustee.

Every post here is to help educate and inform you about the world of bankruptcy. If you are considering bankruptcy, but feel a moral obligation to repay a friend or relative first, speak with a bankruptcy attorney before you make a costly mistake. In North Carolina, call the Law Offices of John T. Orcutt at +1-919-646-2654 for a free debt consultation.

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