Certain individuals with specific types of relationships with both individual and corporate bankruptcy debtors are classified as insiders. In this article, we define the term “insider” and explain what effect the insider designation has on creditors in bankruptcy proceedings.

Key Takeaways

• An insider is a party considered to have an influence on a debtor’s actions, making them subject to closer scrutiny by the bankruptcy court
• Individual debtors and corporate debtors have different parties listed in the Bankruptcy Code as insiders
• The list of insiders for both individual and corporate debtors is not exhaustive
• Being considered an insider affects creditors in multiple ways, including a longer challenge period for potential preferences and not having their votes count toward reorganization plan acceptance

What Is an Insider of Individual Debtor?

In bankruptcy law, an insider of an individual debtor is any of the following parties:

• Any relative of the debtor
• A general partner of the debtor
• A partnership in which the debtor is a general partner
• A corporation of which the debtor exercises control

An insider is thought to be in a position to influence the debtor’s actions. Because of their close relationship, transactions between debtors and insiders are not considered to be at arm’s length, making them subject to the close scrutiny of the bankruptcy court. 

What Is an Insider of Corporate Debtor?

An insider of a corporate debtor is any of the following parties:

• A director, officer, or person in control of the debtor
• A partnership in which the debtor is a general partner
• A general partner of the debtor
• A relative of a general partner of the debtor, director, officer, or person in control of the debtor.

These lists of who is considered an insider are not exhaustive. In the past, bankruptcy courts have recognized other non-statutory insiders that fall within the definition of an insider but are not listed in any of the enumerated categories.  

Effects of Being an Insider

Being considered an insider affects creditors in several ways.

• Unless the creditor is an insider, a debtor in possession or a trustee may avoid and recover preferential transfers made by a debtor to a creditor only within the 90 days prior to when the debtor filed for bankruptcy. If the creditor is an insider, the Bankruptcy Code allows for the avoidance and recovery of preferential transfers made in the one-year period prior to when the debtor filed for bankruptcy. 
• In states that have adopted the Uniform Voidable Transfer Act, transfers to insiders may be voidable if they were made while the debtor was insolvent and the insider had reasonable cause to believe the debtor was insolvent
• Insiders’ votes do not count towards the acceptance of a plan of reorganization in Chapter 11 bankruptcy
• Insiders receive greater court scrutiny for transactions they’ve had with the debtor for fairness and special benefits