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 Maine, as in all states, the concept of preferential transfers is governed by federal bankruptcy law, specifically under the U.S. Bankruptcy Code. According to the Code, a preferential transfer occurs when a debtor makes a payment or transfers an asset to a creditor within 90 days before filing for Chapter 7 bankruptcy (or within 1 year if the creditor is an insider), which results in that creditor receiving more than they would have in the bankruptcy proceedings. These transfers are considered unfair to other creditors who would receive less as a result. The bankruptcy trustee has the authority to recover such transfers through a clawback action, redistributing the assets or funds to the bankruptcy estate for equitable distribution among all creditors. This ensures that all creditors are treated fairly and that no one creditor can jump ahead in line before the bankruptcy filing. It's important to note that while the Bankruptcy Code is federal law and applies uniformly across the United States, local state laws in Maine may provide certain exemptions that can affect the bankruptcy estate and the treatment of preferential transfers.