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 Maryland, as in all states, the concept of preferential transfers is governed by federal bankruptcy law, specifically under the U.S. Bankruptcy Code. According to Section 547 of the Bankruptcy Code, a preferential transfer is any payment or transfer of an interest of the debtor in property made to a creditor within 90 days before the debtor files for bankruptcy (or within 1 year if the creditor was an insider), for a debt owed by the debtor before the transfer was made, that enables the creditor to receive more than it would have received in a Chapter 7 case if the transfer had not been made. The purpose of this rule is to ensure equitable distribution of the debtor's assets among all creditors during the bankruptcy process. If a bankruptcy trustee identifies a preferential transfer, they can seek to have the transfer undone or the assets returned to the bankruptcy estate. This process, known as a clawback, is intended to redistribute the recovered assets or funds to all creditors according to the provisions of the Bankruptcy Code. Maryland state law does not alter these federal provisions, and the federal bankruptcy courts located in Maryland would apply these rules in bankruptcy proceedings.