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 Michigan, as in all states, preferential transfers are 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 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 filing of the bankruptcy petition (or within one year if the creditor was an insider), that enables the creditor to receive more than it would have received in a Chapter 7 liquidation case. If a bankruptcy trustee identifies a preferential transfer, they can file an action to avoid the transfer and recover the assets or funds for the bankruptcy estate. This process, often referred to as a 'clawback,' is designed to ensure equitable distribution among all creditors. Michigan state law does not alter the federal rules on preferential transfers, and the federal bankruptcy courts in Michigan would apply these federal provisions to cases filed within the state.