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What is Charging Order Protection
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Video Transcript
Today we're going to talk about charging order protection. Charging order protection is a certain characteristic that partnerships and limited liability companies have. It's very important for asset protection because a lot of times you put your assets into an LLC or a limited partnership and the charging order protection keeps your creditors from getting assets inside the LLC or partnership.

So, charging order protection – basically, if a creditor tries to get your assets inside your LLC or partnership, he is usually statutorily forbidden from doing so. Instead, a creditor may only get a charging order which entitles him or her to only distributions made from the LLC to you, the debtor and that’s only if and when distributions are made.

Most often what happens is if someone gets a charging order against the LLC you have an ownership interest in because you owe that creditor a debt, the manager just doesn’t make any distributions and the creditor ends up with nothing and it's just a stalemate.

You can't get assets out because it could go to the creditor but the creditor is not going to get anything and the creditor may not become a member of the LLC, may not get assets inside the LLC, may not control the LLC, and may not force assets out of the LLC. So, they're really left high and dry until you decide well okay, we'll make a distribution and give it to you which maybe never.

So, for that reason, most creditors and I've actually read court cases where you know the prosecutor or the – I’m sorry, the plaintiff’s attorney after the case said this just isn't fair. He started, you know, whining but the law is the law and we're going to use it to our advantage.

A lot of times creditors don’t even try and get a charging order against your LLC because they know in most circumstances it's not going to do them any good. In fact, I used to work with the late great Dr. Arnold Goldstein he did asset protection for 45 years.

He’s an emeritus professor at Northeastern University, two law degrees, a Ph.D. He had almost 20,000 clients or rather his law firm did most of which he handled at least in some capacity on a personal level over his 45-year career and he set up well over 10,000 LLCs.

He had several hundred clients with LLCs. He gets sued or you know at some point have some type of creditor problem and they had LLCs. Well, only three or four of those LLCs out of those 10,000 or out of those several hundred that got sued, only three or four ever got a charging order against him.

So, most of the time, the LLC works and they won't even try for a charging order and your assets just stay safe but the creditor does get a charging order although they will most likely not get your assets. If you need to get assets out of that entity, it may be difficult for you so if you're relying on an income stream for that LLC or whatnot, there are ways that we can make it so they cannot even get a charging order against your LLC.

But you do want to understand for your LLC or partnership to benefit from this charging order protection your LLC or other entity needs to be set up and operated in a careful and correct manner.

It's not rocket science but it needs to be done right and a lot of asset protection planners don’t know all the ways that a creditor can circumvent your charging order protection and that’s why I often not only have I read tons of court cases to see ways creditors might try and pierce through an LLC and the flaws those LLCs have but I often work with attorneys with many many years of litigation experience and for that reason we always reinforce our LLCs so that creditors won't have a way to convince a judge to say hey, just disregard that charging order protection, let me get the assets in that LLC.

So, when may a creditor circumvent charging order protection?
Well, if you have an LLC with only one owner, we call that single-member LLC, it may not have charging order protection. Now, this is not settled in every State but there's at least three or four States I can think of, California, Colorado, Florida among others, that there are court cases that have shown single-member LLC, no asset protection in those States and quite possibly in other States, no asset protection, no charging order protection for single-member LLCs.




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