What Is A Charging Order?

by Bruce Givner on October 19, 2011

Assume a creditor gets a judgment against you, and your valuable asset is a membership interest in a limited liability company.  What does the creditor do to satisfy his judgment?  The creditor must go to court and ask the judge for a charging order.  The charging order means that your membership interest in the LLC is charged with the payment of the creditor’s judgment.  Of course, you and your family, or your friends, are probably in control of the LLC.  Therefore, if a creditor is successful in getting a judge to issue a charging order, you will use your influence to reduce or eliminate any distributions from the LLC.  In other words, the creditor will have a difficult time getting his judgment satisfied with distributions from the LLC and the charging order will be unsuccessful.

Under California law, and under the laws of 13 other states, a creditor can – if the charging order is unsatisfied – ask the court to allow a foreclosure of your membership interest.  In theory that sounds pretty frightening.  However, the foreclosure is of your membership interest; it isn’t of the LLC’s assets.  And in California the foreclosure is – at least to my knowledge – almost never used, and never satisfactory to the creditor.  So most asset protection lawyers ignore foreclosure as a risk. www.GivnerKaye.com (310) 207-8008

 

{ 7 comments… read them below or add one }

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