What is a Charging Order
What is a charging order? The only provision for creditors to reach into assets protected by FLPs and LLCs is the charging order. Under the charging order, the creditor must legally be paid any distributions that would have been paid to the debtor. This allows the business to continue operation without interruption, and provides a way for creditors to be paid.
Limitations of the Charging Order
However, the charging order has severe limitations that make it an unattractive option for creditors:
Available only after a successful lawsuit
Charging orders are available only after creditors have successfully won a judgment against you. That means that even while the lawsuit is proceeding, assets protected under FLPs or LLCs are fully protected and available for personal use.
Most FLPs/LLCs have little or no income to distribute
If the FLP or the LLC merely owns cars, vacation homes, boats and other assets that do not produce income, there would be no income to distribute in the first place.
You still have the full voting rights
You still have the full voting rights, and can make decisions about whether earnings are distributed to partners.
The charging order is actually a poison pill for the creditor. A creditor who forecloses on a charging order would also be liable for the income taxes due on the FLP/LLC’s income – even if they were not distributed! Thus, the creditor could be paying taxes for you even if you vote not to distribute your income to them.