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 New Mexico, 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 applies to Chapter 7 bankruptcy cases and is designed to ensure equitable distribution of a debtor's assets among all creditors. A preferential transfer occurs when a debtor, within 90 days before filing for bankruptcy (or within one year if the creditor is an insider), pays off a debt to one creditor that results in that creditor receiving more than they would have in the debtor's bankruptcy. If a bankruptcy trustee identifies such a transfer, they can file an action to 'claw back' these payments or assets into the bankruptcy estate. The trustee's ability to recover preferential transfers is subject to certain defenses and exceptions, such as payments made in the ordinary course of business or for new value. An attorney can provide specific guidance on how these rules apply to individual bankruptcy cases in New Mexico.