How can I recover debt from assets held in an LLC?

How can I recover debt from assets held in an LLC?

| Jul 6, 2021 | Collections

If a Limited Liability Company (LLC) owes your client money, it will be hard to seek payment from the owner’s personal assets. Yet, it can also work the other way around.

If someone has personal debt, they may still have assets in their LLC, which they think you cannot touch. They are, in part, correct, but not entirely.

What is a charging order?

Let’s say you are chasing a debtor named Bob. He is part owner of an LLC along with Sarah and Jake. The law will not let you claim back the money Bob owes your client from the business itself because that would be unfair to Sarah and Jake. It is not their fault that Bob owes you money.

What you can do is ask a court to issue a charging order. It means that the next time the company pays dividends, wages or any other money to its owners, it can only pay to Sarah and Jake. Any monies destined for Bob will instead go to your client.

If Bob does not like that arrangement, he might try to persuade Sarah and Jake to stop the LLC from paying out to anyone. They might agree, or they might tell him to pay his debts, as they cannot survive without the income.

If all partners of the LLC agree to hold out, you still have one more option. You can seek to foreclose on Bob’s share of the company. Your client could take the profits from the sale to cancel Bob’s debts, or they could take Bob’s share of the company as payment. However, proving Bob’s interest in the LLC might not be straightforward, as a recent California case shows. A thorough understanding of the laws surrounding debt collection is crucial to increase your chances of success.