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 Arizona, as in all states, the concept of preferential transfers is governed by federal bankruptcy law, specifically under 11 U.S.C. § 547 of the Bankruptcy Code. This law states that certain transfers made by a debtor within 90 days before filing for Chapter 7 bankruptcy (or one year if the creditor was an insider) can be deemed preferential. These transfers are considered to unfairly favor one creditor over others. If a bankruptcy trustee identifies a preferential transfer, they can file an action to 'claw back' these funds or assets into the bankruptcy estate. The clawback ensures that all creditors have a more equitable distribution from the available assets of the debtor's estate. The trustee's ability to recover preferential transfers is subject to various defenses and exceptions, such as whether the transfer was made in the ordinary course of business or was intended as a contemporaneous exchange for new value.