Insider Of Corporate Debtor

Bankruptcy codes aid in helping people solve their financial issues. However, lack of knowledge of some terminologies could result to greater problems rather than solving financial problems with bankruptcy. One of this terminologies is insider of corporate debtor. Find out what is insider of corporate debtor and prevent possible issues that come with it.

Insider Of Corporate Debtor

Defining an Insider

An insider refers to a person that has control over a debtor. For individual debtors, an insider can be a relative or a partner. Insiders for corporate debtors include corporation directors, an individual, partnership, or an officer who has over the borrower. Having control over the debtor means the latter has continuing relationship with the former and would like to avoid debts to compromise their connections.

When Does an Insider becomes a Problem?

Bankruptcy is a form of managing debts to ensure that creditors will get paid accordingly. This code also ensures that creditors will be treated fairly as soon as possible. Having an insider, however, can cause a debtor to pay the insider first before other creditors due to their relationship. This is called preferences or preferential payment.

Defining Preferences

Preferences or preferential payment is defined as having the preference in who’s going to get paid first. An insider is someone close to the debtor, which increases the tendency of paying them first before filing for bankruptcy. For instance, a debtor may pay his director first then leave other creditors unpaid then file for bankruptcy. This can be a problem because paying the insider first is against the goal of using bankruptcy to treat all creditors fairly. Paying an insider means the debtor is preferring the insider first then the other creditors are of least priority.

What are Preferential Payments?

A preferential payment is the payment transferred to an insider within 12 months before filing bankruptcy. The court will label any payment handed to insiders within this timeframe as preferential payments that may affect the entire bankruptcy filing process.

The Consequences of Preferential Payments

The main consequence of preferential payments is it can be undone by a bankruptcy trustee. Undoing preferential payments mean the trustee would demand all insiders paid to hand the total amount paid, which will then be used in paying and distributing them evenly across all other creditors. Not only will this take money from insiders, but it will cause more damages to their relationships since the money had to be reclaimed in the end.

Preventing Preferential Payments

Several ways can prevent preferential payments. One is avoid paying insiders within 12 months before filing for bankruptcy. If any payment has been made within this timeframe, stop paying then wait for another 12 months before filing for bankruptcy to ensure the payments won’t be marked as preferential payments. In case you made any payments and want to know whether they count as preferential payments, talk to your bankruptcy attorney to know the next best action. Once bankruptcy has been concluded, the debtor can begin paying insiders again.

Understanding what is insider of corporate debtor will keep people from tarnishing their relationships with insiders while ensuring they didn’t break the bankruptcy code. Check with a bankruptcy attorney to know whether you’ve made preferential payments to insiders or not to avoid further issues.