What is a preferential transfer?

A preferential transfer refers to a transaction made by a debtor to a creditor that gives that creditor an advantage over other creditors in the event of bankruptcy. Specifically, this occurs when a debtor is insolvent and transfers property or an interest in property to a creditor in order to settle or pay off a debt.

The reason this is categorized as preferential is that it is seen as an advantage to that particular creditor at the expense of others who have legitimate claims against the debtor. Bankruptcy law seeks to ensure equitable treatment of all creditors, and preferential transfers are scrutinized to prevent practices that would unfairly benefit one creditor over others.

In this context, a transfer made in good faith does not meet the criteria of a preferential transfer, as good faith implies a lack of intent to prefer one creditor over another. Similarly, transfers made under court order or those occurring immediately prior to bankruptcy may not necessarily be classified as preferential unless they meet specific conditions outlined in the bankruptcy code, such as the intent and time frame of the transaction. Therefore, the correct answer provides a clear understanding of what constitutes a preferential transfer in the context of insolvency and bankruptcy proceedings.