A preferential transfer is made when a debtor—prior to filing for Chapter 7 bankruptcy—pays off a certain creditor or group of creditors, which causes other creditors to get less in the bankruptcy.

Preferential transfers (also called preferences) are prohibited because they benefit one creditor at the expense of the others.

When a bankruptcy trustee learns of a pre-bankruptcy payment or transfer that constitutes a preferential transfer, the trustee can petition the bankruptcy court to have the money or assets recovered (a clawback) and included in the bankruptcy estate—allowing the recovered money or assets to be used for the benefit all of the creditors.

In Alabama, as in all states, the concept of preferential transfers is governed by federal bankruptcy law, specifically under the U.S. Bankruptcy Code. According to 11 U.S.C. § 547, a preferential transfer occurs when a debtor, within 90 days before filing for Chapter 7 bankruptcy (or within one year if the creditor is an insider), pays off a debt to one creditor that results in that creditor receiving more than they would have in a Chapter 7 case. This is not allowed because it gives an unfair advantage to one creditor over others. When a bankruptcy trustee identifies such a transfer, they have the authority to recover the assets or funds (clawback) so that they can be redistributed fairly among all creditors. The trustee's ability to claw back preferential transfers ensures that all creditors are treated equitably and that the debtor's available assets are distributed in accordance with the provisions of the Bankruptcy Code.