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 West Virginia, as in all states, the concept of preferential transfers is governed by federal bankruptcy law, specifically under the Bankruptcy Code (Title 11 of the United States Code). According to the Code, a preferential transfer is any payment or transfer of an interest of the debtor in property, made to a creditor for a debt owed, that occurs within 90 days before the debtor files for bankruptcy (or within 1 year if the creditor was an insider), and that enables the creditor to receive more than they would have received in a Chapter 7 case if the transfer had not been made. The trustee in a bankruptcy case has the power to avoid these transfers and recover the assets or funds for the benefit of all creditors in the bankruptcy estate. This is to ensure equitable distribution among all creditors. The trustee can file an adversary proceeding in the bankruptcy court to recover preferential transfers. It's important to note that there are certain defenses and exceptions to what constitutes a preferential transfer, such as payments made in the ordinary course of business or contemporaneous exchanges for new value.