WHAT IS 'Charging Order'

A charging order is a court-authorized right granted to a judgment creditor to attach distributions made from a business entity, such as a limited partnership (LP) or limited liability company (LLC), to a debtor who is a partner of the business entity. 

The charging order is usually limited to the dollar amount of the judgment and is similar to a garnishment of wages or income. It does not give the creditor management rights in the entity, nor can the creditor interfere in the management of the entity to which the debtor is a partner or member.

BREAKING DOWN 'Charging Order'

A charging order allows an entity that is owed money by someone who is a partner or member of a business entity such as a limited partnership or limited liability company to put a lien on money distributed to the debtor through the business entity. A charging order does not give the creditor rights of ownership of the company, but until the debt is satisfied the creditor can legally attach distributions to the debtor from the business entity.

There are some states that do not limit creditors to a charging order to satisfy their claim. These states, based on varying criteria and circumstances, allow the creditor to foreclose on the interest of the debtor in the investment-based entity. In essence, the creditor can force the liquidation of the entity in order to satisfy the claim against the debtor. 

In particular, a debtor's interest in a single-member LLC may be foreclosed upon in addition to the grant of a charging order. The reasoning is that there are no other non-debtor members whose interests need be protected; therefore, the entity can be liquidated and the proceeds used to satisfy the creditor's judgment claim. 

Charging order limitations, in the states that have them, such as California, are a good way to protect partnership assets. They are also common in the U.K.

Tax Ramifications of Charging Orders

It is commonly argued that a creditor who attaches the distributions of a debtor from an LLC is responsible for paying the taxes on these distributions. This, however, is untrue according to Revenue Ruling 77-137, which specifies that since the creditor is not a member of the LLC, the creditor does not pay taxes on these distribution, but rather the debtor does. In the case in which the creditor forces the liquidation of the LLC to pay the debt, the creditor at that time would be responsible for taxes on the liquidation.

RELATED TERMS
  1. Creditor

    A creditor is an entity that extends credit by giving another ...
  2. Creditors' Committee

    A creditors' committee is a group of people who represent a company's ...
  3. External Claim

    A claim against an individual that does not arise out of any ...
  4. Preferred Creditor

    A preferred creditor is an individual or organization that has ...
  5. Debtor

    A debtor is a company or individual who owes money also often ...
  6. Debtor in Possession (DIP)

    A debtor in possession (DIP) is a person or corporation that ...
Related Articles
  1. Investing

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay. Learn about debt- and corporate-entity-based strategies for protecting your assets.
  2. Managing Wealth

    Protect Your Personal Assets

    A family limited partnership (FLP) can go a long way toward securing your family's property.
  3. Investing

    The Basics of Forming A Limited Liability Company (LLC)

    An LLC is a good combination of protection with flexibility and tax benefits. It provides an array of taxation alternatives while shielding individual members from personal liability.
  4. Personal Finance

    Fighting Back Against Collection Lawsuits

    There are still options available to those being pursued by a creditor.
  5. Personal Finance

    7 Tips For The Do-It-Yourself Debt Manager

    Hired gun not in your budget? Learn to be your own credit counselor.
  6. Trading

    Asset protection for the business owner

    Learn about common asset-protection structures and which vehicles might work best to protect particular types of assets.
  7. Investing

    LLC versus incorporation: Which should I choose?

    Learn about the advantages of forming an LLC over a corporation, including ease of administration, and the advantages that a corporation may offer.
  8. Financial Advisor

    Build A Wall Around Your Assets

    Learn how to protect your money from lawsuits, creditors and other judgment proceedings.
  9. Managing Wealth

    Protect Your Assets from Liability in Illinois

    Asset protection is a fundamental part of risk management. Use these tips to protect your assets.
  10. Personal Finance

    How the debt collection agency business works

    Understanding how the debt collection business works will give you a better chance of coming out ahead if you ever have to tangle with a collection agent.
RELATED FAQS
  1. Which Creditors Are Paid First in a Liquidation?

    Find out the order in which creditors are paid during a corporate liquidation. Learn how bankruptcy claims by secured and ... Read Answer >>
Hot Definitions
  1. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  2. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  3. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  4. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center