What are Preference and Insider Payments?
Timothy M. Hughes • May 18, 2020
Under bankruptcy law, all creditors of the same priority need to be treated equally by the debtor. When a debtor repays one creditor and not others, it is considered a “preference” because the debtor is providing special treatment to a single creditor. All creditors of the same priority need to be treated equally under bankruptcy law. If a debtor pays one person or one entity and not others, the bankruptcy trustee has the right to void that transaction and bring the money back into the debtor’s bankruptcy estate so that all the debtor’s creditors will be paid the same percentage. The preference period for a normal creditor (i.e. credit card companies) is 90 days versus one year for an insider because transactions with insiders are more closely scrutinized. The question of whether a creditor is considered an “insider” in a bankruptcy case is an important distinction.
If a debtor has repaid a creditor a significant amount of money before filing for bankruptcy, it is important to disclose the transaction(s) related to the payment(s) in detail. This includes identifying the payees who are insiders. The bankruptcy code defines an “insider” to include a relative of the debtor or a general partner of the debtor. And “relative” is defined to mean an individual related by affinity or consanguinity within the third degree as determined by the common law, or an individual in a step or adoptive relationship within such third degree.
Courts have also defined insider more broadly to include a close family friend (but not relative), Courts have also looked at whether there is a close enough relationship between the debtor and the creditor that their transactions should be scrutinized at more than regular arms-length transactions. The courts look at whether the creditor could exert any influence over the debtor. If the creditor has some control over the debtor, then the creditor could be defined as an “insider.”
In addition to possibly undoing preference payments described above, a bankruptcy trustee has Avoidance Powers to go back four years to undo a transaction if there was a fraudulent transfer or transfer for less than fair market value. The chapter 7 bankruptcy trustee is an individual appointed by the Department of Justice to oversee the administration of a chapter 7 bankruptcy case. The trustee’s main duty is to examine the debtor under oath to determine whether or not there are any assets to be administered for the benefit of creditors. In most chapter 7 bankruptcy cases, there are no assets for a trustee to administer. This is because the state of Illinois exemption laws provide debtors with the ability to protect a specific amount of personal property while going through the bankruptcy process. However, the trustee also has avoidance powers. These powers give him the ability to undo certain transactions if it was done under two specific scenarios: 1) Fraudulent Transfers -- an act(s) made with actual intent to hinder, delay or defraud creditors, and 2) Transferred Asset For Less Than Fair Market Value – an act(s) made for less than the fair market value by a debtor who was insolvent at the time of the transfer.
If you would like more details, please do not hesitate to call our office. Our office has been successful in helping consumers with collection problems for over 28 years. If you have a debt or tax problem, please contact me at (847) 705-9698 or thughes@lavellelaw.com
and find out how. we can help you. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
More News & Resources
Lavelle Law News and Events
$65 Million Sale of Business – a Lavelle Law Success Story. We were able to effectively negotiate the terms of a complex sale in a manner that enabled both buyer and seller to achieve their objectives.
Explore the nuts and bolts of condominium law and gain actionable strategies to navigate today’s condominium and HOA challenges in Illinois.
The Illinois General Assembly enacted Public Act 1738, amending several provisions of the Illinois Code of Civil Procedure to raise debtor exemption limits effective 1.1.26. The new law provides expanded protection for residents, marking the most significant increase to the state’s exemption statutes in over a decade.
A crucial estate planning tool that many people in Illinois overlook is putting their home in a trust. Placing your house in a revocable trust offers multiple benefits. It avoids probate, which can save your family time and money after your death.
In response to Executive Order 14247 requiring the Internal Revenue Service to eliminate the use of physical checks, the U.S. Department of the Treasury announced that paper tax refund checks for individual taxpayers will be phased out.
The 2025 Lavelle Law Charities Food Drive benefiting the Schaumburg Township Food Pantry has begun! Join us in our efforts to bring food, dignity, and hope to residents in need who rely on the food pantry. The need is greater than ever this year, as the food pantry serves over 1,300 households each month!
Our experienced family law attorneys, Joe Olszowka, Annette Corrigan, and Kristina Buchthal Alkass, discussed three key areas of family law matters: prenuptial/postnuptial agreements, collaborative divorce, and child custody. This video is a recording of their presentation on September 17, 2025.
Lavelle Law's Dealership Law team saves client thousands for alleged advertising violations.
Taylor Swift’s engagement to Travis Kelce has made a big splash in the news. In this podcast, Lavelle Law family law attorneys Joe Olszowka and Kristina Buchthal Alkass discuss the importance of prenuptial agreements - and not just for the wealthy.
The U.S. Treasury Department issued a preliminary list of nearly 70 jobs that qualify for “no tax on tips.” The occupations include a wide range of services spanning from Rickshaw drivers to digital content creators.
