You formed a Kentucky LLC to keep your personal money safe from business risk. Now debt has you weighing bankruptcy. You have one big question. What happens to your ownership stake? This page answers that. It covers how a Chapter 7 or Chapter 13 filing treats your membership interest, when a trustee can reach it, and how Kentucky law protects it. For help choosing which chapter fits your situation, see our small business bankruptcy page. Nick Thompson has practiced bankruptcy law in Kentucky since 1991 and serves Jefferson, Oldham, Bullitt, Spencer, Nelson, and Meade counties.
Your LLC Interest Is an Asset in the Case
When you file personal bankruptcy, you are the debtor, not your company. The LLC is a separate legal entity. But your ownership interest in it is still an asset of the case. The law that says so is 11 U.S.C. section 541(a). That means the trustee looks at it. Whether the trustee can take and sell it comes down to two things. The first is how many members the LLC has. The second is what your operating agreement says.
Single-Member LLCs: The High-Risk Case
If you are the only owner, your interest is exposed.
- The Chapter 7 trustee steps into your shoes as the owner.
- With no other members to protect, courts often let the trustee sell the business assets or the whole interest to pay your creditors.
- Your single-member LLC can be dissolved as a result of your personal filing.
- Talk to an attorney before you file. Chapter 13 or specific exemptions may protect the value.
Multi-Member LLCs: More Protection
If your LLC has other members, Kentucky law gives you an edge.
- The trustee can take your economic interest but usually cannot take your management rights.
- The pick your partner rule keeps a trustee from being forced on your partners as a manager.
- So the trustee holds an interest that is hard to sell. That makes it less worth taking.
The economic interest is limited to your right to receive future distributions or profits. The trustee cannot force the LLC to pay them out.
Kentucky’s Charging Order Protection
Kentucky gives creditors one narrow tool to reach a member’s interest. It is the charging order, set by Kentucky Revised Statute (KRS) section 275.260.
Under the statute, a court can place a lien on your interest to pay the unpaid judgment. That lien gives the creditor:
- The right to receive future distributions made to you.
- No right to join the management, voting, or operations of the LLC.
- No right to force a sale of the LLC’s assets.
This creates a weak asset for the creditor. The other members can simply hold back distributions, which leaves the charging order creditor with nothing to collect. You can read the statute on the Kentucky Legislature’s website.
Ipso Facto Clauses and Section 541(c)
Many operating agreements include a clause that strips a member of ownership the moment they file bankruptcy. These are ipso facto clauses.
Federal law limits them. The law here is 11 U.S.C. section 541(c)(1). It blocks any clause that takes away your interest just because you filed. This holds true even if the clause sits in your operating agreement or in state law.
- The result: even if your agreement says you lose your rights when you file, your economic interest still becomes property of the estate.
- The caveat: this mainly protects the economic interest. In Chapter 7, the trustee may still try to control or sell the company’s assets. Fights over management rights often turn on KRS section 275.260. The transfer limits in your agreement matter too. This is most true in multi-member LLCs.
This is detailed ground. The quality of your lawyer matters here.
Chapter 13 Can Help You Keep the Interest
When keeping the business is the goal, Chapter 13 is often the better path. A Chapter 13 plan lets you keep your property. That includes your business interest. In return, you make a three to five year repayment plan. If you have steady income, that plan can shield the interest while you reorganize. To compare Chapter 7 and Chapter 13 for your situation, see our small business bankruptcy page.
Frequently Asked Questions
Do you serve LLC owners in Oldham and Bullitt counties?
Yes. The office handles LLC owner bankruptcy for clients in Jefferson, Oldham, Bullitt, Spencer, Nelson, and Meade counties. Call 502-625-0905 to set up a consultation.
Can a trustee take my single-member LLC?
Often, yes. In a single-member LLC, the Chapter 7 trustee can step in as owner and sell the assets or the interest to pay your creditors. Chapter 13 may protect it, so talk to an attorney before filing.
Does the charging order protect me in bankruptcy?
The charging order under KRS section 275.260 limits what a judgment creditor can reach. Whether it protects your interest in a bankruptcy case depends on your facts. A consultation can walk through it.
Do I meet with the attorney directly?
Yes. Nick Thompson personally meets with every client and prepares every petition himself. Call 502-625-0905 to schedule.
Talk to a Kentucky LLC Bankruptcy Attorney
Your business and your personal finances are tied together, and the wrong filing can cost you the company. Nick Thompson has practiced bankruptcy law in Kentucky since 1991 and holds U.S. Tax Court License #51. He serves Jefferson, Oldham, Bullitt, Spencer, Nelson, and Meade counties. Call 502-625-0905 for a confidential consultation.
Resources for Bankruptcy
Louisville Kentucky Bankruptcy Forms.
Kentucky Commissioner Foreclosure Sales.
How to Get Money Back from a Commissioner Foreclosure Sale.
Bankruptcy Attorney Fees and Costs in Louisville, Kentucky.
Chapter 13 Bankruptcy and Student Loans: the simple solution
School Student Loan Default College Liability.
What Is Kentucky Higher Education Student Loan.
If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. Make sure to review this Kentucky bankruptcy required document checklist before you contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.