DEFINITION of 'Charging Order'

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 akin 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/member.

BREAKING DOWN 'Charging Order'

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.

RELATED TERMS
  1. External Claim

    A claim against an individual that does not arise out of any ...
  2. Collection-Proof

    A debtor who doesn’t have any assets that a creditor can collect ...
  3. Creditor

    A creditor is an entity that extends credit by giving another ...
  4. Debtor

    A company or individual who owes money. If the debt is in the ...
  5. Stipulated Judgment

    A court order that requires one party to pay another party a ...
  6. Deficiency Judgment

    A judgment made by a court against a debtor indicating that the ...
Related Articles
  1. Personal Finance

    What Does a Creditor Do?

    A creditor is a person or entity that loans money or provides goods or services to another entity with the expectation of being paid back in the future.
  2. Taxes

    What's a Debtor?

    A debtor​ is an individual or company that owes money.
  3. Managing Wealth

    Protect Your Personal Assets

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

    Equity Stripping Leaves Creditors Empty-Handed

    Add additional debt to your real estate assets to keep the creditors at bay.
  5. Trading

    Asset Protection For The Business Owner

    Could incorporating your business help protect it? Find out here.
  6. Financial Advisor

    How to Protect Assets from Creditors and Lawsuits

    Proper planning is required to ensure that a client’s assets are truly protected. Here are some strategies that can help shield them from seizure.
  7. Small Business

    Understanding Limited Liability

    Limited liability is a legal concept that protects equity owners from personal losses due to their ownership interest in the company.
  8. Financial Advisor

    Build A Wall Around Your Assets

    Learn how to protect your money from lawsuits, creditors and other judgment proceedings.
  9. 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.
  10. Small Business

    Alternatives To Business Bankruptcy

    Bankruptcy isn't the only alternative for a struggling business. It can try negotiating with creditors or liquidating assets outside the U.S courts.
RELATED FAQS
  1. Can a creditor sue me for a delinquent account?

    Learn what happens when an account is delinquent and read about the regulations that protect consumers who have delinquent ... Read Answer >>
  2. Do creditors have the same rights in all 50 US states?

    Learn more about the rights of creditors to pursue their debts; how they may vary from state to state and how they are regulated ... Read Answer >>
  3. In a corporate liquidation, why are unpaid taxes and wages paid before general creditors ...

    The Bankruptcy Code, section 507, states that when a corporation is liquidated, creditors are paid in a particular order: ... Read Answer >>
  4. Are qualified retirement plans protected from creditors?

    Learn how to protect your retirement assets from creditors. Certain provisions provide for exemption of retirement assets ... Read Answer >>
  5. What are the full rights of creditors in cases of bankruptcy?

    Learn more about corporate bankruptcy and the rights of creditors. Find out how creditors are repaid in the event of bankruptcy ... Read Answer >>
Hot Definitions
  1. IRR Rule

    A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of ...
  2. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  3. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  4. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  5. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  6. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
Trading Center