In bankruptcy, an insider is a person or business that’s in a close relationship with a debtor (the person filing for bankruptcy). It’s common for an insider to have sensitive information about the debtor that isn’t widely known.
The bankruptcy court frowns upon a debtor doing favors for insiders over other creditors (such as paying out all available funds to people the debtor is close to). Therefore, transactions between the insider and the debtor get looked at critically.
Specifically, you’ll have to report such transactions on official bankruptcy form Statement of Financial Affairs for Individuals Filing for Bankruptcy. If the court finds that you inappropriately transferred money to an insider, it’s likely that the bankruptcy trustee—the official appointed to oversee your case—will unwind the transaction, recover the funds, and distribute them to creditors.
You can expect the trustee to look for the following transactions.
Preferences. The courts look carefully at the transactions made within the 90 days before the bankruptcy case was filed to determine if the debtor was trying to pay off debts owed to favored creditors. If the debtor made the transaction to or for the benefit of an insider, the look-back period would extend to one year.
Fraudulent transfers. The courts consider several factors when looking for fraud, including whether the debtor sold an item of property for its fair market value (rather than for a song) or transferred it to an insider.
Bankruptcy law lists examples of people and companies that are considered to be insiders. The list doesn’t include every possible type of insider. Also, the courts determine who is (or is not) an insider on a case-by-case basis. Here are some examples.
When the debtor is an individual:
When the debtor is a business:
Also, for both debtor types, insiders can include an affiliate or insider of an affiliate, as well as the managing agent of the debtor.