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 Dakota, 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, within 90 days before filing for Chapter 7 bankruptcy (or within one year if the creditor was 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 case. This is considered unfair to other creditors who are owed money. The bankruptcy trustee has the authority to recover such preferential payments or transfers, a process known as a clawback, to redistribute the assets equitably among all creditors. The trustee can file a lawsuit in the bankruptcy court to recover these assets. It's important for debtors and creditors in South Dakota to be aware of these rules to avoid any transactions that might be considered preferential before filing for bankruptcy.