What Is A Charging Order And How Can It Help Me Collect?
If your debtor has interests in a business – such as a partnership or limited liability company (LLC) – a charging order may make it easier to collect what you are owed. While you can’t seize assets from the business, you can get a legal order requiring the LLC or partnership to pay you instead of the debtor. Like a wage garnishment, a charging order redirects money owed to the debtor by the LLC or partnership to you. For example, if your debtor owns a partnership interest in a business, and that business makes monetary distributions to the partners, a charging order will require the business to pay you instead of your debtor. If the business disregards the charging order and pays your debtor, it is now on the hook for the debt.
How Do Charging Orders Work?
Charging orders are a specialized legal remedy for enforcing judgments against a debtor’s interest in a partnership or LLC. They give creditors the right to receive distributions or profits that would otherwise go to the debtor. Charging orders are most effective when the debtor has a substantial ownership interest in an LLC or partnership.
Creditors can obtain a charging order to place a lien on the debtor’s share of distributions. This ensures income generated from the debtor’s business interest is used to satisfy the debt. This strategy is beneficial when the debtor’s primary assets are tied to business interests.
Answers To Charging Order FAQs
As you evaluate the effectiveness of this strategy for you, you may have questions about how these orders work. These are some of the most common ones we hear from other clients:
When is a charging order used in debt collection?
A charging order is used in debt collection when the debtor has an ownership interest in a partnership or LLC. It is a tool specifically designed to target the debtor’s share of profits or distributions from these business entities. Charging orders are particularly effective when the debtor’s primary assets are tied up in business interests. This allows creditors to reach inaccessible income streams through traditional collection methods like wage garnishment or bank levies.
Can a charging order compel an LLC to distribute to satisfy a debt in California?
A charging order does not compel an LLC to make a distribution. Instead, it grants the creditor the right to receive any distributions that would otherwise be paid to the debtor. The LLC retains discretion over whether and when to make distributions. If an LLC chooses not to distribute profits, a creditor cannot force a distribution through a charging order. However, the charging order can ensure that future distributions are directed to the creditor until the judgment is satisfied.
What are the main limitations of charging orders?
The main limitations of charging orders include:
- Lack of control: Creditors do not gain control over the debtor’s interest in the LLC or partnership. They are only entitled to distributions that the debtor would receive.
- Discretionary distributions: LLCs and partnerships can choose to retain earnings rather than make distributions, which can delay debt recovery.
- Nonliquid asset: Charging orders apply to nonliquid assets, meaning creditors cannot force the sale of the debtor’s interest in the business entity.
How are charging orders similar/different from other debt collection methods in California?
Charging orders are similar in that they can target the debtor’s collection of specific assets, and creditors can enforce them via court order.
Charging orders differ from other debt collection methods in that they specifically target a debtor’s interest in a partnership or LLC. Unlike wage garnishment or bank levies, which target liquid assets like wages or bank accounts, charging orders attach to a debtor’s share of business distributions. This can make them particularly useful for reaching inaccessible assets through traditional methods. However, charging orders can also come with limitations, such as the inability to compel distributions or liquidate the debtor’s business interest.
What is the process for obtaining a charging order?
To obtain a charging order in California, a creditor must file a motion with the court where the judgment was entered. The motion should detail the debtor’s interest in the partnership or LLC and request that the court issue a charging order against that interest. Upon review, the court may grant the order, directing the business entity to pay any distributions due to the debtor directly to the creditor. This process can allow creditors to effectively enforce judgments against business interests while respecting the legal structure of partnerships and LLCs.
Collect The Money You Are Owed
As a creditor, a charging order gives you the upper hand. In addition to collecting payments, a charging order places a lien on the business. As lien holder, you can foreclose, potentially even dissolving the LLC or partnership.
Stop Chasing Debtors – Call 310-278-8600
Is your debtor giving you the run-around, refusing to pay up? At Joshua P. Friedman & Associates, Inc., we don’t play games. We get results. Attorney Joshua Friedman will pursue every available avenue of payment – including charging orders – until he gets you the money you are owed.
Our Los Angeles firm practices solely in the area of debt collection. We aren’t afraid of a fight. Our team uses time-tested, strategic and aggressive tactics that get our clients what they want most: repayment of the debts they are owed. Contact us online or call 310-278-8600 to begin the debt collection process.