What is a Charging Order?
So what’s a charging order? I’d like to answer this question with a story (sort of).
Let’s say I’m a real estate investor (I really am) who has all his properties properly structured inside of an LLC. One day I get into a car wreck.
This results in a judgment against me because it exceeded the limits of the liability for my auto-insurance policy. Because of that they want to try and shake down my LLC.
But they can’t touch my LLC. This is due to the protections that an LLC gives you. It allows your assets to be protected from the personal actions you take in your day to day life. And then of course the charging order comes into play.
The Charging Order
The charging order protects you from creditors. It’s not something you get in the mail. In most states, there’s 3 things a charging order prevents creditors from doing:
- Taking your membership interest in an LLC,
- Taking over the management function of your LLC
- Force your LLC to sell its assets
In the unlikely event you do lose a lawsuit with an LLC, you’ll be okay for the most part. However, you don’t just get off “Scott free” (ironically, my name is Scott and I get people off all the time when it comes to lawsuits.)
What they can do is put a lien against your LLC. If the creditors put a lien against your LLC, that means any distributions from your LLC to you will go straight to your creditors.
Not to worry, there’s ways around a lien if you do ever end up with one against your LLC or an LLC you have an interest in.
One of the ways to get around a lien is to sell your interest in the LLC to another party. They won’t be able to touch the money you gain from that sale, which makes the lien useless.
Make sure you know the laws regarding a charging order before you form one in a specific state. As always when it comes to an LLC, some states offer certain advantages and disadvantages.
Fun Fact: The charging order wasn’t originally created to protect debtors. It was actually meant to protect co-owners of an LLC from having to work with creditors or a deceased co-owners spouse.