Preferential transfer

A preferential transfer is a payment made by a bankrupt entity in the 90-day period prior to the bankruptcy, which must be paid back by the recipient. A payment is considered to be a preferential transfer when the payer was insolvent at the time of the payment, and the effect of the payment was to put the recipient in a better position than other creditors who were not paid.

The 90-day period is expanded to one year prior to the bankruptcy date if the recipient was a corporate insider. An insider is considered to be someone who can control the activities of the debtor, or a relative of that person. This extension of the applicable period is used under the theory that an insider would know of liquidity issues well before any other creditors.

The intent behind the preferential transfer concept is to return funds to the bankrupt entity, from which they can be disbursed to its creditors. Otherwise, those creditors lucky enough to have already been paid by the bankrupt entity would fare better than the other creditors.