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preferential transfer

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 Texas, as in all states, the concept of preferential transfers is governed by federal bankruptcy law, specifically under the U.S. Bankruptcy Code. According to Section 547 of the Bankruptcy Code, a preferential transfer is any payment or 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 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 recover those assets or funds (clawback) to redistribute them equitably among all creditors. This ensures fair treatment of all creditors and prevents favoritism. The trustee's ability to claw back preferential transfers is a federal power, but it can be affected by state laws, such as exemptions that may protect certain transfers from being clawed back.

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