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 Delaware, 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 statute defines a preferential transfer as any transfer of an interest of the debtor in property made to or for the benefit of a creditor, for or on account of an antecedent debt, made while the debtor was insolvent, within 90 days before the date of the filing of the petition, or between ninety days and one year before the date of the filing of the petition if the creditor was an insider. The purpose of this rule is to ensure equitable distribution of the debtor's assets among all creditors during a bankruptcy proceeding. If a bankruptcy trustee in Delaware identifies a preferential transfer, they can seek to have the transfer undone. This process is known as a clawback, and it is intended to recover assets for the bankruptcy estate, thereby allowing for a more fair distribution among all creditors. An attorney specializing in bankruptcy law can provide specific guidance and representation in matters involving preferential transfers.