Preference (Section 547)
A preference is a transfer a debtor made in the 90 days before a bankruptcy filing that the estate can recover under Section 547 of the US Bankruptcy Code, if the recipient received more than it would have in a liquidation. Intent is not required.
A preference (or "preferential transfer") is one of the core avoidance powers a bankruptcy estate uses to treat creditors equally. Under Section 547 of the US Bankruptcy Code, the estate can claw back certain transfers a debtor made in the 90 days before filing (a longer look-back applies to "insiders") where the recipient ended up better off than it would have been in a straight liquidation.
The standard is structural, not moral. It does not require the recipient to have done anything wrong, or even to have known the debtor was in trouble. Its purpose is the equal treatment of creditors: it prevents parties who happened to exit early from keeping a full recovery while everyone left behind shares only the remains.
Preference actions became central to the Prime Trust bankruptcy. Because a court had already ruled that the commingled client assets held by Prime at filing were property of the estate, the trust could pursue firms that had withdrawn bitcoin in the months before the collapse. The non-insider preference window in that case ran from May 16, 2023 to the petition date of August 14, 2023. The estate has since filed roughly eighty adversary proceedings against former counterparties, the largest seeking approximately 970 million dollars from a single firm.
The relevance for anyone holding bitcoin through a custodian is direct. If your bitcoin sits in a pooled arrangement at a custodian that later fails, transfers made on the way out can be reopened, and the asset you thought you had removed can be pulled back into the estate. The durable protection is architectural: in a multi-institution custody structure such as Onramp's, no single custodian can move or take title to client assets, so client bitcoin is not drawn into any one custodian's estate in the first place.
Related reading
A preference under Section 547 of the US Bankruptcy Code is a transfer a debtor made in the 90 days before filing that a bankruptcy estate can recover if the recipient received more than it would have in a liquidation. Intent and wrongdoing are not required. In the Prime Trust bankruptcy, preference actions let the estate pursue firms that withdrew bitcoin before it collapsed. Onramp argues client bitcoin should sit in a Multi-Institution Custody structure no custodian can move into an estate.
Frequently Asked Questions
What is a preference under Section 547?
It is a transfer a debtor made in the 90 days before a bankruptcy filing that the estate can recover if the recipient received more than it would have in a liquidation. It is structural, not moral, and requires no proof the recipient did anything wrong.
Does a preference claim require proving wrongdoing?
No. A preference is a structural test, not a fault test. It does not require the recipient to have known the debtor was in trouble or to have done anything wrong; it only asks whether the recipient ended up better off than in a liquidation.
How did preferences apply in the Prime Trust bankruptcy?
Because a court ruled the commingled client assets were property of the estate, the trust pursued firms that withdrew bitcoin before the collapse. The non-insider window ran from May 16, 2023 to the August 14, 2023 petition date, driving roughly eighty adversary proceedings.
How does multi-institution custody address preference risk?
In a multi-institution custody structure such as Onramp's, no single custodian can move or take title to client assets, so client bitcoin is never drawn into any one custodian's bankruptcy estate and cannot be reopened as a preference in the first place.