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Can I file a Personal Bankruptcy with a Multi-Member Limited Liability Company (LLC)?

Yes an owner of a LLC can file bankruptcy in Florida. There is nothing that prevents a member of a multi-member limited liability company (MMLLC) from filing a personal bankruptcy in Florida or anywhere else in the United States. Additionally, if a member files a personal bankruptcy, the assets of the MMLLC can be protected from being taken by your bankruptcy trustee to settle your personal debts. This is because assets of a Florida multi-member LLC are not considered part of your bankruptcy estate. Charging orders are the exclusive remedy against a multi-member LLC in Florida. Once a charging order is obtained any distribution you might be entitled to receive from the multi-member LLC could be taken by the party holding the charging order. Most creditors find a charging order unattractive because along with the right to obtain distributions comes the responsibility for income taxes on the income generated by the ownership interest in the Florida LLC.

This is set out in Florida Statute 605.0503, which precludes a personal judgment creditor from being able to satisfy a personal judgment by using a member’s interest in a multi-member LLC to take assets belonging to the multi-member LLC. This statute explicitly limits a personal judgment creditor’s ability to satisfy a personal judgment by using a member of a multi-member LLC’s interest in a LLC to obtaining a charging order from a court. A charging order allows a judgment creditor to collect (but not demand) distributions from the multi-member LLC that the member is entitled to. Thus, bankruptcy courts have used this Florida Statute to prevent assets of a multi-member LLC from becoming part of a member’s personal bankruptcy estate, but at the same time hold that a bankruptcy trustee can also collect any distribution the member of a multi-member LLC may become entitled to just like a charging order. This can also be unattractive for the trustee because of the income tax liability that goes along with a charging order. In some cases where there is a fraudulent transfer or fraudulent conveyance of assets to a multi-member LLC, the trustee can undo the transaction and have access to the assets directly.

It is very important to realize the situation is completely different when filing a personal bankruptcy while owning a single-member limited liability company (SMLLC). The assets of a SMLLC are not protected in any way from being made part of your personal bankruptcy estate and being taken to satisfy your debts.

Just because the assets of a multi-member LLC may not be made part of your personal bankruptcy estate, your multi-member LLC is not necessarily completely safe from still being impacted by a personal bankruptcy. Each situation is unique and thus how a personal bankruptcy may affect a Florida multi-member LLC will differ. That is why it is very important to speak with an experienced bankruptcy attorney who is also familiar with multi-member LLCs and how bankruptcy could affect them. Contact the Law Office of David M. Goldman, PLLC today for more information at (904) 685-1200.

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