Charging Order Protection




Charging order protection is an important legal concept that affects many types of businesses and their owners.  Charging order protection may also serve as a valuable asset protection planning tool.
Technically, a charging order is a creditor remedy.  It is a court order that allows a creditor to intercept any distributions of income or profits that are paid out by a limited liability company or limited partnership to a member/partner who owes money to a judgment creditor. 


The Charging Order as an Exclusive Remedy
All states allow for charging orders, but the law on charging orders is not uniform throughout the country.  The laws of some states say that charging orders are merely one remedy available to a creditor to collect on a judgment; many of these same states allow the creditor to foreclose on the ownership interest of the judgment debtor in the LLC or limited partnership if it appears that a charging order will not satisfy the judgment within a "reasonable period of time."  By comparison, in some other states, the charging order is the sole and exclusive remedy for a creditor; these states deny the creditor the right to foreclose on the judgment debtor's ownership interest in the LLC or limited partnership.
We believe that the charging order concept is an important asset protection tool. Through careful planning, we endeavor to protect a client’s ownership interest in business entities by availing ourselves of charging order protection where available.  In addition to analyzing the client's business, we consider the availability of charging order protection for LLCs and limited partnerships in those jurisdictions which limit the judgment creditor to a charging order as the sole and exclusive remedy.
The Scope of the Charging Order
Creditors holding a charging order are not allowed to interfere with the management of the business.  In particular, creditors cannot use the charging order to compel the management of the business to make a distribution in order to satisfy the creditor's claim.  Whether a distribution is to be made is entirely within the discretion of management, which has the sole authority to determine whether, when, and how much to distribute.
This limitation is another important consideration that may be used to shield a client's assets from a judgment creditor.  If you have control of, or significant influence over, the management of the business entity, this means that you get to decide if and when distributions are made.
If you know that a distribution will be going to your creditor and not you, then you are not likely to authorize payment of a distribution. Instead, you are more likely to reinvest excess funds back into the business or invest the money into new ventures. The bottom line is that, as long as the funds are not distributed to you, the creditor cannot rely on a charging order to disgorge those funds.
Keeping the Problem in Perspective
You should bear in mind that charging order protection is not a panacea. While the charging order limitation prevents the creditor from reaching into your business to grab cash, the charging order can make it difficult for you and your business partners to withdraw money from the business or obtain bank financing.
At best, charging order protection discourages the judgment creditor from wanting to pursue your ownership interest and distribution rights in a business entity, cognizant that there is no assurance of a forthcoming distribution.  At worst, charging order protection creates a legal stalemate in which neither the creditor nor you can access excess funds accumulating inside the business entity. Accordingly, the goal of your asset protection plan should be to facilitate a favorable settlement.  If the creditor knows that you will never authorize a distribution that will wind up in their pocket, you can often settle the matter for pennies on the dollar.
Charging Order Protection in Florida
In Florida, the charging order is the sole and exclusive remedy for a judgment creditor trying to collect against a debtor's interest in a multimember LLC or limited partnership. (Please note that there is no such limitation with respect to a debtor's interest in a single-member LLC.)  Accordingly, your judgment creditor must sit and wait for your business entity to authorize a distribution to you, an event which has no guarantee of happening at any time in the near future.  The creditor must not only wait to collect, but the creditor must bear the risk that your business remains free to use its excess cash in activities that carry significant risk of loss.
If you own assets outside of Florida, however, things become more complicated.  As mentioned above, many states do not limit creditors to a charging order.  They also allow a creditor to foreclose upon a debtor’s ownership interest in an LLC or LP if a charging order will not result in the payment of the judgment within a reasonable period of time.  The same is also true here in Florida if your LLC is a single-member LLC (i.e., your interest can be foreclosed upon). 
In those states that permit foreclosure on a member's LLC or LP interest, the creditor may seize your ownership interest in your business entity to meet their claim.  However, if the business entity is properly structured, the creditor does not gain admission as a new member or partner by virtue of foreclosing on your ownership interest.  Therefore, even in those states that permit the foreclosure, the creditor may be locked out of management, such that the foreclosure remedy does not yield a significantly different result from the outcome in a state in which the charging order is the sole and exclusive remedy.  In other words, even with foreclosure, the creditor may still be compelled to come to a settlement.  Therefore, the level of asset protection needed for your business will depend upon the type of business entity you've chosen and where it is located.
Should You Form Your LLC Outside Your Home State?
If your home state does not provide all the creditor protection you want, you can form an LLC in a more debtor-friendly state.  You do not have to form your asset protection entity in your home state, even if that is where you live or do business.  However, should litigation arise, there is no guarantee that the courts in your home state – or the courts in the state where you formed your entity – will apply the law you want.  Given the complexity surrounding "conflict of laws" principles involving business entities, the use of an out-of-state jurisdiction for asset protection planning should not be undertaken without experienced legal counsel. 



State Law Matrix:  Charging Order Protection


DISCLAIMER: This matrix is provided for informational purposes only.  Code references may not be the most current.  Please verify official sources before using for legal purposes.

State

LLC Creditor Remedy

Limited Partnership Creditor Remedy


Alabama

Charging Order Exclusive
Ala Code §10A-5A-5.03


Charging Order Exclusive
Ala Code §10A-9A-7.03

Alaska

Charging Order Exclusive
Alaska Stat §10.50.380


Charging Order Exclusive
Alaska Stat. §32.11.340

Arizona

Charging Order Exclusive
Ariz Rev Stat. Ann §29-655


Charging Order Exclusive
Ariz Rev Stat. Ann §29-341

Arkansas

Charging Order
Ark Code Ann §4-32-705


Charging Exclusive
Ark Code Ann §4-47-703

California

Charging Order and Foreclosure
Cal. Corp. Code §17705.03


Charging Order and Foreclosure
Cal. Corp. Code §15907.03

Connecticut

Charging Order Exclusive
Conn Gen Stat §34-259b


Charging Order and Foreclosure
Conn Gen Stat §34-349

Delaware

Charging Order Exclusive
Del Code Ann §18-703


Charging Order Exclusive
Del Code Ann §17-703

District of Columbia

Charging Order and Foreclosure
DC Code §29-805.03


Charging Order and Foreclosure
DC Code§29-707.03

Florida

Single-Member: Charging Order and Foreclosure
Multi-Member: Charging Order Exclusive
FL Stat Ann §605.0503


Charging Order
FL Stat Ann §620.1703


State

LLC Creditor Remedy

Limited Partnership Creditor Remedy


Georgia

Charging Order and Garnishment
GA Code Ann §14-11-504


Charging Order and Garnishment
GA Code Ann §14-9-703

Hawaii

Charging Order and Foreclosure
Haw Rev Stat Ann §428-504


Charging Order and Foreclosure
Haw Rev Stat Ann §425E-703

Idaho

Charging Order and Foreclosure
ID Code Ann §30-25-503


Charging Order and Foreclosure
ID Code Ann §30-24-703

Illinois

Charging Order and Foreclosure
IL Code §180/30-20


Charging Order
IL Code §215/703

Indiana

Charging Order
Ind Code Ann §IC-23-18-6-7


Charging Order and Foreclosure
Ind Code Ann §IC-23-4-1-28

Iowa

Charging Order and Foreclosure
Iowa Code Ann §489.503


Charging Order and Foreclosure
Iowa Code Ann §488.703

Kansas

Charging Order Exclusive
Kan Stat Ann §17-76-113


Charging Order Exclusive
Kan Stat Ann §56-1a403

Kentucky

Charging Order and Foreclosure
KRS § 275.260


Charging Order and Foreclosure
KRS § 362.2-703

Louisiana

Charging Order
LA Rev Stat Ann 12:1331


No Statute - No Charging Order

Maine

Charging Order Exclusive
ME Rev Stat Ann 31§1573


Charging Order and Foreclosure
ME Rev Stat Ann 31§1383

Maryland

Charging Order and Foreclosure
MD Code Ann §4A-607


Charging Order
MD Code Ann §10-705

Massachusetts

Charging Order
MA Gen Laws Ann – Ch 156C §40


Charging Order
MA Gen Laws Ann – Ch 109 §41

Michigan

Charging Order Exclusive
Mich Comp Laws §450.4507


Charging Order
Mich Comp Laws §449.1703


State

LLC Creditor Remedy

Limited Partnership Creditor Remedy


Minnesota

Charging Order Exclusive
M.S.A. §322C.0503


Charging Order and Foreclosure
M.S.A. §321.0703

Mississippi

Charging Order Exclusive
Miss Code Ann §79-29-705


Charging Order
Miss Code Ann §79-14-703

Missouri

Charging Order
V.A.M.S. §347.119


Charging Order
V.A.M.S. §359.421

Montana

Charging Order and Foreclosure
Mont Code Ann §35-8-705


Charging Order and Foreclosure
Mont Code Ann §35-12-1103

Nebraska

Charging Order and Foreclosure
Neb Rev Stat §21-142


Charging Order and Foreclosure
Neb Rev Stat §67-430

Nevada

Charging Order Exclusive
Nev Rev Stat §86.401


Charging Order Exclusive
Nev Rev Stat §88.535

New Hampshire

Single-Member: Charging Order and Foreclosure
Multi-Member: Charging Order Exclusive
NH Rev Stat §304-C:126


Charging Order
NH Rev Stat §304-B:41

New Jersey

Charging Order
N.J.S.A. §42:2C-43


Charging Order
N.J.S.A. §42:2A-48

New Mexico

Charging Order
NM Stat §53-19-35


Charging Order and Foreclosure
NM Stat §54-2A-703

New York

Charging Order
NY Lim Liab Co Law §607


Charging Order
§8-A-121-703

North Carolina

Charging Order Exclusive
NC Gen Stat §57D-5-03


Charging Order
NC Gen Stat §59-703


State

LLC Creditor Remedy

Limited Partnership Creditor Remedy


North Dakota

Charging Order Exclusive
ND §10-32.1-45


Charging Order Exclusive
ND §45-10.2-64

Ohio

Charging Order Exclusive
Ohio Rev. Code §1706.342


Charging Order
Ohio Rev. Code §1782.41

Oklahoma

Charging Order Exclusive
Okl St Ann § 18-2034


Charging Order Exclusive
Okl St Ann § 54-500-703A

Oregon

Charging Order
O.R.S. §63.259


Charging Order
O.R.S. §70.295

Pennsylvania

Charging Order Exclusive
Pa C.S.A. §15-8454


Charging Order
Pa C.S.A. §15-8563

Puerto Rico

Charging Order Exclusive
14 L.P.R. § 3994


Charging Order
10 L.P.R. § 1435

Rhode Island

Charging Order
RI Gen Laws §7-16-37


Charging Order
RI Gen Laws §7-13-41

South Carolina

Charging Order and Foreclosure
S.C. Code Ann § 33-44-504


Charging Order
S.C. Code Ann § 33-42-1230

South Dakota

Charging Order Exclusive
SD Cod Laws §47-34A-504


Charging Order Exclusive
SD Cod Laws §48-7-703

Tennessee

Charging Order Exclusive
T.C.A. §48-218-105


Charging Order Exclusive
T.C.A. §61-3-703


State

LLC Creditor Remedy

Limited Partnership Creditor Remedy


Texas

Charging Order Exclusive
Tex Bus Org Cod §101.112


Charging Order Exclusive
Tex Bus Org Cod §153.256

Utah

Charging Order and Foreclosure
UT §48-3a-503


Charging Order and Foreclosure
UT §48-2e-703

Vermont

Charging Order and Foreclosure
11 V.S.A §4074


Charging Order
11 V.S.A §3463

Virginia

Charging Order Exclusive
VA Code Ann §13.1-1041.1


Charging Order Exclusive
VA Code Ann §50-73.46:1

Washington

Charging Order and Foreclosure
WA §25.15.256


Charging Order and Foreclosure
WA §25.10.556

West Virginia

Charging Order and Foreclosure
W. VA. Code §31B-5-504


Charging Order and Foreclosure
W. VA Code §47B-5-4

Wisconsin

Charging Order
W.S.A. §183.0705


Charging Order
W.S.A. §179.63

Wyoming

Charging Order Exclusive
WY Stat Ann §17-29-503


Charging Order and Foreclosure
WY Stat Ann §17-21-504

Updated February 2021
DISCLAIMER: This matrix is provided for informational purposes only.  Code references may not be the most current.  Please verify official sources before using for legal purposes.