Charging Orders

The one remedy that is always available to a creditor of a Member of a limited liability company is a charging order from a court.

A charging order  instructs an LLC and its Manager that if and when the LLC makes a distribution to the Member in question, it must pay the money to the court or to the creditor.  If you have a problem with a creditor, you can expect the creditor to seek a charging order that would intercept any distributions from your LLC to you.

Notice that a charging order does not compel the LLC to make a distribution.  It merely sets up a waiting game.  Even with the charging order, the creditor cannot directly reach the LLC’s assets – nor can the Member benefit from those assets while the charging order is in place.

The waiting game is not symmetrical.  While it continues, the Member knows that the assets continue to be managed as before.  The creditor, on the other hand, will worry that the LLC’s assets may dwindle because of poor management or because the Member has established a channel, perhaps by transactions between the LLC and a third party, to drain the assets.

The practical effect of the waiting game is to greatly strengthen the Member’s bargaining position in negotiating a settlement with the creditor.

To achieve the maximum advantage vis a vis future creditors and litigants, use an LLC formed in a jurisdiction that allows a charging order as the only remedy available to the creditor of Member.

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