What is a Charging Order?

A charging order is a court-ordered authorization for a creditor awarded a judgment against a debtor to attach or collect distributions from a partnership, of which the debtor is a member or partner. United States statutes governing the operation of a charging order include the Uniform Limited Partnership Act of 2001, the Uniform Limited Liability Company Act of 1996, the Revised Uniform Partnership Act of 1994, with the Charging Orders Act of 1979 being the corresponding statute in the United Kingdom. The charging order was instituted to shield the non-debtor partners from a seizure of all of the business assets and interference in business affairs. Similar to a garnishment, a charging order assigns or transfers only the distributable assets due to a debtor over to a creditor. A judgment creditor cannot take on management, engage in business, vote on business decisions, or interfere with the running of the business in any way.

Historically, before the institution of the charging order, the courts viewed a partnership as a single unit. A creditor who won a judgment against one partner was able to seize the assets of the entire business. The non-debtor partners experienced economic losses that equaled or even exceeded that of the debtor partner. Non-debtor partners began to petition the courts for legal protection of their rights against the liabilities of their debtor partners.

Often viewed as an asset protection tool, the charging order stipulates four key points. First, the charging order imparts a passive right or lien against the assets of the non-debtor partner with no right to sell the assets, with the order restricted to the monetary amount of the judgment. Second, the creditor cannot pursue other legal remedies other than the charging order and foreclosure on the order. Third, the creditor is an assignee, not an owner, and, therefore, has no control or voting rights. Finally, if a foreclosure occurs, where the equitable right of redemption of the assets is legally terminated, the purchaser of the foreclosed property receives only the same rights as the creditor.

In some states, creditors may pursue single-member limited liability companies, in which the debtor is the exclusive partner, with both a charging order and successively, a seizure of all of the company assets in a foreclosure. The debtor partner could otherwise just move to suspend all distributions, and the creditor would have no other recourse. Courts allow the foreclosure under these circumstances as there are no other partners with rights to preserve in the picture. The entire company can be forced to liquidate and satisfy the judgment with the money received.