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 Virginia, 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 states that certain transfers made by a debtor within 90 days before filing for Chapter 7 bankruptcy (or one year if the creditor was an insider) can be considered preferential. These transfers are made to a creditor that results in the creditor receiving more than they would have received through the bankruptcy proceedings. The bankruptcy trustee has the authority to recover such transfers to ensure equitable distribution among all creditors. This process, known as a clawback, is intended to prevent any creditor from gaining an unfair advantage over others. The trustee can file an adversary proceeding in the bankruptcy court to recover the preferential payments or transfers. If successful, the recovered assets are then redistributed in accordance with the priorities established in the bankruptcy code. It's important for debtors and creditors in Virginia to be aware of these rules to avoid any transactions that might later be undone during bankruptcy proceedings.