Insider Payments Before Bankruptcy: 6 Transfers a Trustee Can Claw Back

An owner who lends money to a failing company and takes it back before the company files has made a transaction the Bankruptcy Code will examine for a full year, not ninety days. Outsiders get the shorter window. Officers, directors, persons in control, their relatives and the company's affiliates are all "insiders" under section 101(31), and the Code assumes, with some reason, that the people closest to the books knew first.

The trustee's view of the year before filing is not guesswork. Official Form 207, the statement of financial affairs every business debtor signs, asks at line 4 for payments within one year "on debts owed to an insider or guaranteed or cosigned by an insider," and at line 30 for any value given to an insider in that year, "including salary, other compensation, draws, bonuses, loans, credits on loans, stock redemptions, and options exercised." The six transfers below are the ones those questions were drafted to find.

1. Repayment of the Owner's Own Loans Reaches Back a Year

Section 547(b)(4)(B) extends the preference period to transfers "between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider." The other elements do not change: the payment must be on account of an antecedent debt, made while the company was insolvent, and it must leave the insider better off than a chapter 7 distribution would have.

Insolvency is where the longer window becomes harder for the trustee. Section 547(f) presumes insolvency only during the ninety days before filing, so a repayment made in month seven requires the trustee to prove the balance sheet, which under section 101(32) means debts greater than all property "at a fair valuation." An owner's records from that month matter more than the owner's memory of how things felt.

Consider a hypothetical: a company borrows $60,000 from its founder in January, repays it in March, and files in November. The March payment falls inside the insider year and outside the ninety days, so the presumption is gone but the exposure is not, and if the trustee can show the company was already insolvent in March (a showing that may rest on a single month's statements, an appraisal of used equipment, and whatever the accountant booked as receivables, which is to say on documents the founder prepared or approved), the founder may be asked to return the March payment.

State law can reach the same payment by another road. New York's Debtor and Creditor Law section 274(b) makes a transfer "to an insider for an antecedent debt" voidable when the debtor was insolvent "and the insider had reasonable cause to believe that the debtor was insolvent," subject to a one-year limit in section 278.

2. Payments to Outside Lenders Can Be Recovered From the Guarantor

This is the transfer owners rarely see coming. A company that pays down a bank line or a merchant cash advance the owner personally guaranteed has paid an outsider, but it has also shrunk the owner's own exposure, and Form 207 asks about those payments for exactly that reason.

The Code handles the split carefully. Under section 547(i), when a trustee avoids a transfer made between ninety days and one year before filing, to a non-insider "for the benefit of a creditor that is an insider," the avoidance counts "only with respect to the creditor that is an insider." Section 550(c) then bars recovery from the outside lender for that period. What remains is section 550(a)(1), which permits recovery from "the entity for whose benefit such transfer was made."

Whether a guarantor is a "creditor" at all, by virtue of its contingent right to be reimbursed by the company, is not answered on the face of section 547, and it is a question for counsel on the facts. The answer determines whether months of payments the owner never touched come back to the owner as a demand.

3. Salary and Bonuses Outside the Ordinary Course

Section 548(a)(1) names insider employment contracts twice, once in its opening words and again in (B)(ii)(IV), which lets a trustee avoid a transfer made "to or for the benefit of an insider, under an employment contract and not in the ordinary course of business," if the company received less than reasonably equivalent value. Insolvency need not be shown on that route.

A salary paid at the same rate for five years is one thing. A retention bonus approved in the final months, for an owner who was going nowhere, is another.

4. Distributions to Owners Bring No Value Back

Section 548(d)(2)(A) defines value as "property, or satisfaction or securing of a present or antecedent debt of the debtor." A distribution on equity satisfies no debt. When a company pays its members or shareholders while insolvent, or leaves itself with "unreasonably small capital," or expects debts beyond its ability to pay, the constructive fraud route of section 548(a)(1)(B) reaches the payment for two years before filing.

Tax distributions to pass-through owners are distributions too, however routine they feel. Section 544(b) lets the trustee borrow state law where an actual unsecured creditor could avoid the transfer, and New York's section 274(a) has a four-year limit for this kind of claim, which is why the reach-back on distributions can exceed the federal two years. The statute of limitations for the trustee to sue is a separate matter, set by section 546(a).

5. A Lien Granted to an Insider Is a Transfer

Section 101(54) defines "transfer" to include "the creation of a lien." An owner who takes a security interest to cover money lent long ago has received a transfer on account of an antecedent debt, and the insider year applies. For fraudulent transfer purposes, section 548(d)(1) treats a transfer not perfected before the case as made immediately before the petition, and the preference statute keeps timing rules of its own. The UCC filing date belongs in the file.

6. Assets Moved to a Related Company

The last category is the one that most resembles intent. Equipment, customer contracts or cash moved from the failing company to an affiliate the owner controls invite the actual fraud route of section 548(a)(1)(A), and New York's list of badges in section 273(b) includes a transfer to an insider, retained control, concealment, and a suit pending or threatened beforehand. Affiliates are insiders under section 101(31)(E), and section 550(a)(2) lets the trustee follow the property to later transferees, subject to a defense in 550(b) for those who took "for value ... in good faith, and without knowledge of the voidability of the transfer avoided." A new company formed with the old company's assets and no documented price is the shape a trustee looks for, and whether the owner meant anything by it is precisely what the paperwork will be asked to show.

Before the Last Transfer Is Made

Every item on this list can be defended with value, timing, ordinary course, or good faith, and every defense is easier to build before the transfer than after. Delancey Street, a business debt settlement company and not a law firm, reviews merchant cash advance and other business obligations at no cost and negotiates with those creditors outside court; it does not advise on insider transfers, and an owner who has repaid itself, guaranteed debts now being paid down, or moved assets between companies should put those facts before bankruptcy counsel first. Delancey Street is a place to test whether settlement is realistic. It is not a substitute for that conversation.

The year before filing is read backward, by someone who already knows how it ended.