You could compare a charging order to a kind of wage or earnings garnishment. A creditor may get a charging order from a court against a partner of an LLC who is in debt. The creditor can use the courts to attach earnings that are owed to the debtor partner in order to satisfy a court judgment.
Commonly, a charging order limits the amount of collection to the amount of the judgement. It also imposes certain other protections on the LLC and on other “innocent” partners. To really understand how charging orders might work in different places, it’s important to consider the rules that protect the LLC and non-debtor partners in more depth.
Charging Order Protection For LLCs
In some places, the charging order is the only judicial remedy that a creditor might obtain. This limitation is meant to offer protection to the entire organization and particularly, to non-debtor partners in the LLC.
These are important limitations to a charging order:
- A charging order does not allow the creditor to attach any assets that the LLC might own.
- It also does not allow the creditor to manage the company in any way.
In short, this kind of judicial order is meant to help creditors recoup their debts from the partner. On the other hand, it’s also meant to limit the ability of the creditor to impact partners who don’t owe debts. Also, this regulation has been crafted to help keep an organization intact. Even though the debtor in the organization must satisfy the judgement, the partners who don’t owe debts are free to keep running the company, keep the organization’s assets, and continue taking their own earnings.
Charging Order Protection in Less Debtor-Friendly Jurisdictions
Again, different courts have interpreted the rules differently. It’s important to note some exceptions to the protection of a charging order:
- Judicial foreclosure: In some jurisdictions, the rules are different. Creditors may also attempt to get the court to grant them judicial foreclosure on the debtor partner. This foreclosure might force the non-debtor partners to either buy out the debtor partner’s assets, offer a stake to the creditor, or even liquidate the entire company.
- Sole partner LLCs or all partners owe debt: In addition, the protection of a charging order might not apply to an LLC with only one partner. It also might not apply to any LLCs when all partners owe the creditor. The way that this has been applied has been left up to courts in various jurisdictions, so it’s important to consider local precedents.
In debtor-friendly states, charging orders can offer powerful protection for LLC partnership. In other places, the rules may allow the creditor more power to pierce these protections. It’s important to understand the way that these regulations apply in order to make good decisions about the way that a company should be organized and what might happen if one partner gets into financial trouble.