LLCs are a popular business form of organization because of strong protections from creditor liability. Although Kentucky LLCs can file bankruptcy, it is much more common that members will file bankruptcy. When an LLC interest has net assets, trustees have only moderate success in reaching the assets of the LLC and distributing funds to creditors. It is very difficult for creditors of a member to sell off assets of a limited liability company.

Bankruptcy For Limited Liability Companies, or, LLC Bankruptcy

An LLC is like a partnership in the relationship between the members and owners of the business. In most cases, a member’s interest in an LLC can not voluntarily or involuntarily transfer without the permission of each business member. This prevents an outsider from becoming an LLC member who participates in the management of the business unless everyone agrees. Additionally, outside creditors cannot force their way in and become a member.

Limited Liability Companies Bankruptcy Specifics

Judgment creditors of an LLC member can only ask the court for a charging order. That charging order then transfers all the member’s distributions from the LLC operations to the creditor. Then, if the other members decide not to distribute profits from the company, the creditor has no recovery.

However, the Florida Supreme Court authorizes the FTC as a judgment creditor, to force the sale of assets when it is a single-member LLC. Since a bankruptcy trustee has the rights of a judgment creditor and other power granted by the bankruptcy code, a single-member LLC offers very little protection to a bankrupt member.

However, when the LLC has no real assets or liquidity this is not a problem for the LLC or its members. More often than not there is no real equity in the assets of most LLC corporations that have ongoing operations. But the crafty debtor that only seeks to shield his assets by transferring them to a single-member LLC with no business purpose other than shielding the assets, won’t be able to protect those assets.

If you need help with your bankruptcy, you are in the right place. Contact my office right away to start the conversation. Nick C. Thompson, Attorney: 502-625-0905

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