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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:

  1. A Charging order and/or a foreclosure. This is in only a handful of states like California. (Washington, South Carolina, etc. see link below)  
  2. A Charging order only (as the sole remedy) in all the other states. And the best according to legislature is Wyoming.
  3. 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. 

Find more FAQs here

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