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 Wisconsin, as in all states, the concept of preferential transfers is governed by federal bankruptcy law, specifically under the Bankruptcy Code (11 U.S.C. § 547). 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 in a Chapter 7 case. The bankruptcy trustee has the authority to recover such transfers to distribute the assets more equitably among all creditors. This is done through a clawback action. The goal is to prevent any creditor from receiving an unfair advantage over others. It's important for debtors and creditors in Wisconsin to be aware of these rules, as they can impact the strategy and timing of payments and collections when bankruptcy is imminent. An attorney can provide specific guidance on how these federal laws interact with Wisconsin's state laws and how they may affect individual cases.