How Charging Order Protection Works with Asset Protection
A charging order is an order obtained from a court or judge, by a judgment creditor, against the stock or funds of an entity or land for the amount of their judgment, with interest and costs. Once a charging order exists on an entity – all of the profit distributions go to the creditor as oppose to the debtor. The advantage to this is that, oftentimes, the debtor controls the entity and can refuse to make distributions – making the charging order useless to the creditor.
Most states have some form of charging order protection and other states (which are debtor-friendly) have strong charging order protection laws. Further, the entities that are protected under this tool vary from state to state.
Because proper planning turns the charging order from a creditor remedy to a shield against creditors, any entity to which a charging order may apply is called a ‘Charging Order Protected Entity’ or COPE. COPES include: limited partnerships, limited liability partnerships, limited liability limited partnerships, or limited liability companies (in some jurisdictions, only multi-member LLCs have charging order protection).
Corporations are not COPES. As we have previously said, if a corporate shareholder comes under creditor attack, that creditor may seize his shares of stock for the amount of the outstanding debt. If the shares seized exceed 50% of the company’s voting shares, the creditor could then vote to liquidate the company, and seize his share of the company assets upon liquidation.
You can see why the vulnerability of corporate shares to creditor attachment makes the corporation a relatively poor protective vehicle for personal assets. This inability to seize COPE interests is what makes these entities so desirable for creditor protection.
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