Is Payment To Parents' Corporation A Preference To An Insider

Within six months of filing Chapter 7 bankruptcy a debtor paid back a $10,000 loan from his parents by taking a cash advance on a credit card. In fact, the parents made the loan from a business checking account from their wholly owned family business. The general rule is that the bankruptcy trustee can avoid repayments of loans to family members or other insiders within one year of the bankruptcy petition. The debtors asked whether the bankruptcy trustee could go after their parents for receipt of the loan repayment and whether their credit card company could go after them for borrowing $10,000 shortly before filing bankruptcy when they had no ability or expectation of repayment.

The loan repayment was not directly to the parents, but to a business. The Bankruptcy Code defines insiders to include relatives of the debtor such as a parent. The definition does not seem to include as an insider a corporation or other business entity owned by a relative. The trustee could argue that the repayment to the parents’ corporation was made indirectly for the benefit of the parents or that the corporation is the parents’ alter ego. The debtor’s intent was clearly to prefer the parents at the expense of other creditors.

The loan from the credit card company was similar to a balance transfer where debtors use one credit card to pay off another card. Balance transfers most often are not problematic because the debtor has not acquired property nor benefitted other than adjustment of interest rates. This transaction is somewhat different than a balance transfer among credit cards because the motivation was not an adjustment in payments or interest. The credit card company may assert that the money was borrowed in contemplation of bankruptcy to make a payment indirectly to the debtor’s family.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida