In my last blog post, I discussed the rights of a creditor when the debtor owns interests in an LLC.  Can the creditor reach the assets of the LLC?  Under Tennessee law, the answer is no.  The creditor’s sole remedy is a “charging order,” which is limited to any financial distributions the LLC makes to its members.  Particularly in the case of single-member of family-owned LLC, the debtor can frustrate the creditor by deciding not to make any distributions.  But the LLC can continue to pay salary, including to family members.

The result is very different if the debtor files for bankruptcy.  In that case, the debtor’s ownership interest in the LLC becomes “property of the bankruptcy estate.”  So the bankruptcy trustee steps into the debtor’s shoes, and has all the ownership rights of the debtor.  In the case of a single-member LLC, the debtor owns all of the LLC interests, so the Trustee can do everything a 100% owner can do.  For example, sell the LLC or the LLC’s assets for the benefit of creditors.  Even if the debtor owns less than 100%, the Trustee can do quite a bit.  For example, force a dissolution under state law, or sell the debtor’s LLC interest to the highest bidder.

…is if you have a judgment against someone who has their assets tied up in an LLC, you may want to consider whether you can file an involuntary bankruptcy against the person.

One practical impact of all this is if you have a judgment against someone who has their assets tied up in an LLC, you may want to consider whether you can file an involuntary bankruptcy against the person.  There are all kinds of requirements and pitfalls with involuntary bankruptcies, but if you can meet the requirements to bring one, it may be your best bet to reach the person’s assets held in an LLC.

photo credit:  Simon Cunningham via flickr cc