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 South Carolina, 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 within one year if the creditor was an insider), and 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 indeed seek to have the transfer undone, or 'clawed back,' to distribute the assets fairly among all creditors. The trustee's action to avoid preferential transfers is a federal remedy, and while the bankruptcy process is federal, local state law, including South Carolina's, can influence certain aspects of the proceedings, such as exemptions and the characterization of property.