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Charging Orders And Debtor Exemptions

Topic Exemption TopicsExemption



PAGE SUMMARY

Charging orders and debtor exemption rights are treated as complementary across U.S. jurisdictions: while a charging order is typically the exclusive remedy for a judgment creditor to reach a debtor’s partnership or LLC interest, it does not override state or federal exemption laws, which statutes and courts expressly preserve. Under both state practice and Federal Rule of Civil Procedure 69(a), courts apply the relevant state charging-order regime, and those statutes commonly state that the remedy cannot be construed to deprive the debtor of applicable exemptions (illustrated with Texas and Delaware provisions). Substantively, a charging order attaches only to the debtor’s distributional interest, not to entity-owned assets—so entity property generally cannot be protected by personal exemptions, but an individual debtor may still assert exemptions in their own membership or partnership interest where the law allows. The document highlights how this plays out with specific exemptions: retirement-account and earnings protections can cap what a creditor may collect through distributions (e.g., garnishment limits and liberal construction of IRA exemptions), and tenancy-by-the-entireties ownership can bar charging orders in states recognizing that form of ownership (but not in states like Iowa that do not). Bankruptcy courts apply the same preservation principle, maintaining debtors’ exemption rights in LLC distributional interests. Procedurally, exemption burdens generally follow ordinary rules (creditor shows ownership; debtor proves exemption), and although charging orders are usually exclusive, courts and some statutes recognize limited exceptions—such as turnover/foreclosure-like remedies in sham or single-member LLC contexts—while still maintaining the baseline protection of exemption law.

Charging Orders And The Debtor's Exemptions

Introduction

Charging orders and debtor exemption rights operate in tandem rather than in conflict across all U.S. jurisdictions. Courts consistently hold that charging orders against partnership and LLC membership interests do not override or eliminate a debtor's exemption rights. Instead, exemption protections are expressly preserved by statute and case law, creating a framework where creditors can obtain charging orders but remain subject to applicable state and federal exemption limitations. This principle applies uniformly whether the charging order is sought in state court, federal court, or bankruptcy proceedings.

Legal Framework for Charging Orders and Exemption Rights

Charging orders represent the exclusive remedy by which judgment creditors may satisfy judgments from a debtor's interest in partnerships and limited liability companies. TX BUS ORG § 101.112 DE ST TI 6 § 18-703 ME ST T. 31 § 1054. Federal Rule of Civil Procedure 69(a) governs execution of money judgments in federal court, providing that state law controls the procedures for execution. Fremont Bank v. Signorelli, Not Reported in Fed. Supp. (2023). This means that both state and federal courts apply state charging order statutes when creditors seek to reach partnership or LLC interests.
The fundamental principle governing the interaction between charging orders and exemption rights is statutory preservation of exemption protections. Every examined state statute contains explicit provisions ensuring that charging orders do not deprive debtors of exemption rights. For example, Texas Business Organizations Code Section 101.112(e) provides that charging order provisions "may not be construed to deprive a member of a limited liability company or any other owner of a membership interest in a limited liability company of the benefit of any exemption laws applicable to the membership interest of the member or owner". TX BUS ORG § 101.112. Similarly, Delaware Code Section 18-703(c) states that "this chapter does not deprive a member or member's assignee of a right under exemption laws with respect to the judgment debtor's limited liability company interest". DE ST TI 6 § 18-703. This uniform approach reflects the underlying policy that exemption laws serve important debtor protection purposes that should not be circumvented through the charging order mechanism.

Scope of Property Subject to Charging Orders

Charging orders reach only a debtor's distributional interest in the entity, not the underlying assets owned by the partnership or LLC itself. Gaslowitz v. Stabilis Fund I, LP, 331 Ga.App. 152 (2015); Duffus v. Baker, 513 P.3d 264 (2022); Baker v. Duffus, 568 P.3d 735 (2025). This fundamental limitation significantly impacts the exemption analysis. In Fremont Bank v. Signorelli, the Northern District of California emphasized this distinction, holding that "Fremont Bank seeks an order charging Family, L.P.'s partnership interests in Pine Brook and PBCP. Family, L.P. is not a natural person. Thus, it may not claim an exemption under section 704.225". Fremont Bank v. Signorelli, Not Reported in Fed. Supp. (2023). The court explained that California exemption laws "apply only to property of a natural person," and business entities cannot invoke personal exemptions to protect their assets.
However, individual debtors retain the right to claim exemptions in their membership or partnership interests themselves. In White v. White, the Utah Court of Appeals held that a member of an LLC cannot claim a homestead exemption in property owned by the LLC because the exemption statute protects "individuals," not business entities, and the member had no individual ownership interest in the property separate from the LLC's ownership. [[ Site.Opinion2017UtahWhiteHomesteadExemption | White v. White }}, 402 P.3d 136 (2017). The court explained that "the homestead exemption is a personal right based upon an individual's interest in property" and requires "that the exemption be claimed by a person as opposed to an entity and that the person claiming the exemption have a legally cognizable interest or estate in the subject property." Because the LLC held title and was the owner of the property, the member could not claim the homestead exemption. This analysis demonstrates how courts carefully distinguish between entity ownership and individual ownership when analyzing exemption claims.

Interaction with Specific Types of Exemptions

Retirement Account Protections

Courts have consistently held that charging orders remain subject to exemption limitations protecting retirement accounts and earnings. In U.S. v. Alexander, a federal district court in Arizona applied state garnishment exemptions even when the federal government sought a charging order for criminal restitution. United States v. Alexander, Not Reported in Fed. Supp. (2016). The court held that "The fact that a charging order is entered, however, 'does not deprive any member of the benefit of any exemption laws applicable to his interest in the limited liability company.'". United States v. Alexander, Not Reported in Fed. Supp. (2016). Because the debtor's LLC distributions qualified as earnings, the charging order could not exceed 25 percent of the debtor's disposable earnings under Arizona garnishment protections. United States v. Alexander, Not Reported in Fed. Supp. (2016).
The Texas Court of Appeals in Heckert v. Heckert addressed IRA exemptions in turnover proceedings, holding that "in the absence of any controverting evidence that the Vanguard account is not entitled to exempt treatment under section 42.0021 under Texas's liberal rules of construction, the trial court abused its discretion by including it in the list of property to be turned over to the receiver". Heckert v. Heckert, Not Reported in S.W. Rptr. (2017). The court emphasized that exemption statutes should be liberally construed in favor of debtors when determining whether retirement accounts qualify for exempt status. Heckert v. Heckert, Not Reported in S.W. Rptr. (2017).

Tenancy by Entireties Protection

Tenancy by entireties ownership of LLC interests provides powerful exemption protection where recognized by state law. In Branch Banking & Trust Co. v. Crystal Centre, a federal district court in Florida denied charging orders against multiple LLC interests held by a married couple as tenants by the entireties. Branch Banking and Trust Company v. Crystal Centre, LLC, Not Reported in Fed. Supp. (2017). The court adopted the magistrate judge's conclusion that "six of the limited liability companies are held by Defendant Mr. Carrerou and Mrs. Carrerou as tenancy by the entireties; thus, the motion for charging order as to those limited liability companies must be denied". Branch Banking and Trust Company v. Crystal Centre, LLC, Not Reported in Fed. Supp. (2017). However, the court granted a charging order against one LLC where the tenancy by entireties protection could not be established. Branch Banking and Trust Company v. Crystal Centre, LLC, Not Reported in Fed. Supp. (2017).
This protection is not universally available, as demonstrated in Wells Fargo Equipment Finance v. Retterath, where the Iowa Supreme Court rejected a tenancy by entireties defense because "Iowa law does not recognize the ownership of property by a married couple as tenants in the entireties". Wells Fargo Equipment Finance, Inc. v. Retterath, 928 N.W.2d 1 (2019). The court held that Iowa law governed the charging order dispute because "a member's membership interest is located where the LLC was formed" rather than where the debtor is domiciled. Wells Fargo Equipment Finance, Inc. v. Retterath, 928 N.W.2d 1 (2019).

Bankruptcy Court Treatment

Bankruptcy courts follow the same principles governing charging orders and exemption rights that apply in other contexts. In In re Holt, a South Carolina bankruptcy court sustained in part a creditor's objection to claimed exemptions, but emphasized that debtors retain distributional interests in LLCs even after dissociation and that exemption rights apply to those interests. In re Holt, 497 B.R. 817 (2013). The court held that "First Citizens' objection to the exemptions claimed by the Holts in the CJ Note is sustained in part and overruled in part. The objection is overruled to the extent First Citizens argues the Holts do not have distributional interests in Low Country". In re Holt, 497 B.R. 817 (2013).
The court explained that South Carolina LLC law specifically preserves exemption rights: "Section 33-44-504(d) provides: 'This chapter does not affect a member's right under exemption laws with respect to the member's distributional interest in a limited liability company'". In re Holt, 497 B.R. 817 (2013). This demonstrates that bankruptcy does not eliminate state law exemption protections in the charging order context.

Procedural Considerations and Burden of Proof

Courts apply standard exemption burden of proof rules in charging order proceedings. In Heckert v. Heckert, the Texas Court of Appeals explained that "once a judgment creditor proves that a judgment debtor owns certain property, the judgment debtor has the burden to prove that property is exempt from attachment, execution, or seizure". Heckert v. Heckert, Not Reported in S.W. Rptr. (2017). However, courts apply liberal construction rules favoring debtors when interpreting exemption statutes, particularly in determining whether retirement accounts qualify for exempt status. Heckert v. Heckert, Not Reported in S.W. Rptr. (2017).
The procedural requirements for obtaining charging orders vary by jurisdiction, but generally require minimal showings. In Fremont Bank v. Signorelli, the court noted that "Neither the Ninth Circuit nor the California Supreme Court has addressed the standard governing motions for charging orders under California Code of Civil Procedure section 708.310. The plain language of section 708.310 appears to require only a showing of the existence of a money judgment and a judgment debtor's 'interest in the partnership or limited liability company.'". Fremont Bank v. Signorelli, Not Reported in Fed. Supp. (2023).

Exclusive Remedy Doctrine and Exceptions

While charging orders are generally the exclusive remedy for reaching entity interests, courts have recognized limited exceptions. In Heckert v. Heckert, the Texas Court of Appeals allowed turnover of LLC interests despite the exclusive remedy doctrine because "neither A2R, Ltd. nor Averse 2 Risk, LLC is an operating business; both entities appear to have been formed by Clyde for the sole purpose of taking ownership of nonexempt assets awarded to him in the divorce". Heckert v. Heckert, Not Reported in S.W. Rptr. (2017). The court's analysis demonstrates that when entities are formed solely to hold nonexempt assets rather than to conduct business operations, turnover may be appropriate notwithstanding the general charging order exclusivity rule.
Some jurisdictions have statutorily expanded creditor remedies for single-member LLCs while maintaining exemption protections. Florida Statutes Section 605.0503(4) allows foreclosure sales when "distributions under a charging order will not satisfy the judgment within a reasonable time," creating an exception to the exclusive remedy doctrine for single-member LLCs, though § 605.0503(2) generally preserves exemption law benefits for transferable interests. FL ST § 605.0503.

Recent Developments

Recent developments show courts continuing to refine the boundaries between entity-level assets and member-level interests while maintaining consistent exemption protections. Several states have amended their statutes to allow foreclosure remedies for sole member LLCs when distributions prove inadequate, but these enhanced remedies preserve general exemption rights. The 2019 decision in Wells Fargo Equipment Finance v. Retterath established that LLC interest situs follows entity formation location rather than member domicile, affecting exemption analysis in multi-jurisdictional scenarios. Wells Fargo Equipment Finance, Inc. v. Retterath, 928 N.W.2d 1 (2019). Courts continue to emphasize that charging orders create liens on distributional interests rather than direct seizure of exempt property, ensuring that exemption protections remain meaningful even as creditor remedies evolve.

Wages

An unsettled issue is whether a D/M may assert the Federal Wage Garnishment Law ("FWGL"), 15 U.S.C. §§ 1671, et seq., should apply to limit the charging order to 25% of the D/M's net disposable income, where the D/M can demonstrate that the distribution, or a part of the distribution, derives from the D/M's labors. For an analogous situation, see U.S. v. Alexander, 2016 WL 2893406 (D.Ariz., 2016).

In the humble opinion of your author, the way this should shake out is as follows:

  • If the debtor is receiving some compensation for services other than a distribution, such as a salary or wages, then the FWGL applies and the creditor should be limited to 25% of the debtor's net disposable income. Note, however, that bonuses are not protected by the FWGL.
  • If the debtor is receiving distributions from the LLC, then the court should examine further to see whether the distributions derive from the debtor's labors ("active income") or not ("passive income"), but which test is different from the tax test.
    • To the extent that part or all of a distribution derives directly from the debtor's own labor, then the FWGL should apply and the creditor should be limited to 25% of the debtor's net disposable income.
    • Otherwise, the distribution should not be subject to the FWGL and 100% of the distribution should be available to the creditor through the charging order lien, subject to any other exemptions that might apply.

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