Asset Protection Questions about Judgment Remedies from Cherif Medawar’s Clients
What type of judgment remedies does the court usually allow plaintiffs to go after if and when they get a judgment against me when I have an LLC?
There are mainly three types of remedies when a plaintiff gets a judgment order to his/her favor against an owner/member of an LLC:
- A Charging order and/or a foreclosure. This is in only a handful of states like California. (Washington, South Carolina, etc. see link below)
- A Charging order only (as the sole remedy) in all the other states. And the best according to legislature is Wyoming.
- Order the LLC to be dissolved (Very rare)
To see how each state deals with the issue of personal creditors' rights and LLCs, follow the link below: http://www.nolo.com/legal-encyclopedia/limited-liability-protection-llcs-a-50-state-guide.html
When it comes to LLCs, a foreclosure is a bad thing and a charging order is a good thing.
In a state where the “foreclosure” of an LLC member’s interest is allowed, if a plaintiff gets a judgment against you (the owner/member) for $50,000 and you do not pay it, the plaintiff can attack the LLC and foreclose on your financial interest portion in it.
So, if your interest is valued at $200,000 and you owe the plaintiff $50,000, he/she can foreclose and keep the entire $200,000.
But if your interest is valued at only $25,000, then the plaintiff will foreclose and get that amount but you will still owe him/her the difference.
In a “charging order” state, the sole remedy is the charging order and there is no foreclosure.
That means if your financial interest in the LLC is valued at $200,000, the plaintiff cannot get to keep it all.
If and when you make a distribution however, then the plaintiff can get some money.
We write the Operating Agreement in a way that makes it legal for you NOT to make any distribution, (only salaries and other expenses etc.), hence you the plaintiff gets nothing except a tax bill for phantom income as explained in our videos and presentations.
In conclusion in a Foreclosure LLC state, the plaintiff can get financial rights over your interest in the LLC. In a charging order LLC state the plaintiff could end up with nothing if the LLCF is drafted properly especially if it is set up in Wyoming.
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