LLC protection from judgments?

[5happycampers]

 I have a rental that is in the foreclosure process- poor purchase AND declining value -tried and tried to short sale. Two lawyers "opinions" were that a deficiency judgemnt would most likely NOT occur. My other rentalas and my home are in other states than the one in trouble. IF the lawyers are wrong - and a judgement is issued AND then a lien put on my home - in another State (the lawyers) told me that this can take a while...) - then I may risk a lot of equity in other property(s)?!. Would an LLC protect my assets - assuming all my property (and my home?) would be owned by the LLC? The note is still in my name- I could transfer/sell the home to my LLC. Am I being clear..  ?? TIA.

[John Hyre]

If there is no "deficiency judgment" on the foreclosure, no problem, because there is no judgment against you at all.  Certain states do limit or ban deficiency judgments.  

Once a judgment is recorded against you, the judgment creditor can enforce it in other states.  Such enforcement can include garnishment of wages, leving against bank accounts in your name and liens on assets.  An LLC in a foreign state can slow such a process down significantly and raise the cost of enforcement, but a determined creditor would likely get liens, if only on the interest in the LLC's (the famous "charging order").  It really turns on the amount of the deficiency, the aggressiveness of the judgment creditor and the other states' laws.  If you see such action coming, I would fight the collection and counter with a low-ball offer to settle out.  Many creditors will take a settlement rather than go through the expensive collection process.  Of course you DID take out the loan and DID promise to pay it......if you can do so, I think from a personal (as opposed to legal) standpoint you should!

John Hyre

[BLL]

If the transfers to the LLC have the intent to make it harder for those creditors to collect (which is the case according to you), then the transfer is fraudulent and will be undone. Since you are facing a judgment, your actions will be more scrutinized than if you had done these things while the financial seas were calm.

[1800Company]

Agreed.  Judges definetely take harsh actions against you if you try to hide money this way.  BLL is right, we always tell our clients, set up LLC's, Offshore Trusts, etc.  when everything is normal (and the purpose is for privacy protection, asset protection or for large assets with safer offshore accounts). 

Never try to set up an account to defraud a creditor, hide from a judgement and especially never to try to hide assets from the government or not pay taxes.

We always tell our prospects, if you are looking to set up a corporation or set up an offshore trust, etc.  Do It Now before trouble happens, rather than later when it's too late. 

[Dave T]

As I understand it, a judgment automatically attaches a lien to any real estate you happen to own in the same county where the judgment is recorded.  If you happen to own property in more than one county in the state, then the judgment creditor would have to record the judgment in each county where you have property to have an automatic lien attach to your property.

Same with property in another state.  The judgment creditor would have to locate your assets, then record the judgment in each county where those assets are located.

If the judgment creditor sees that you have a business that functions on a cash basis (a store for example), the judgment creditor can intercept your receipts to satisfy your judgment.  For example, the judgment creditor can get a court order to seize all the money that comes into your cash registers during an entire day, or maybe just come in near the end of the day and take all the money in the registers at the moment.

Having your property in an LLC may give you charging order protection, but I don't know if that can stop a judgment creditor from intercepting your rents. 

[BLL]

Having your property in an LLC may give you charging order protection, but I don't know if that can stop a judgment creditor from intercepting your rents. 

The charging order prevents the creditor from taking money out of the LLC or influencing decisions concerning it. From the debtor side, the charging order prevents him from taking any money out of the LLC without paying the creditor. He is more likely to settle because he needs money to live. From the creditor side, the charging order prevents him from being paid. He is more likely to settle because he doesn't want to wait to get paid. There are ways to get around a charging order by either party, but it's expensive and the most likely scenario is a settlement between the two.

[Dave T]

BLL,

I understand your point about the charging order. 

The question I pose is whether the judgment creditor can get a court order to "garnish" the rents before they are even paid to the LLC.  In effect the tenants would pay their rent to the judgment creditor and not to the LLC, until the judgment is satisfied.

[BLL]

LLC assets, including receivables (e. g. rents), are not available to creditors. That is the point of a charging order: the personal liability of a member does not impact the operation of the LLC. There are exemptions such as the single member LLC and LLC liability combined with the debtor member.

[motivatedceo]

The LLC option won't work if the lender has a lawyer with any skills - and they probably do.
 
I will give you my honest opinion. I think you are obligated to pay off that debt, whether you get a judgment or not, if it's in your name. And hopefully you agree.

So I would sell any extra assets that you have to either (a) pay off the debt or (b) make payments you can arrange after the lender determines exactly how much you owe them when this is over.

Note that debt I'm talking about paying off is the difference between what you owe on the note and what the lender gets after selling the property. So if you owe them $100k in the end...work it out with them. If it's a big debt and it's in your name, I bet you a nickel that the lender will be coming after you one way or another...even if you are in another state.

Sorry about your situation, but good luck.

I have a rental that is in the foreclosure process- poor purchase AND declining value -tried and tried to short sale. Two lawyers "opinions" were that a deficiency judgemnt would most likely NOT
occur. My other rentalas and my home are in other states than the one in trouble. IF the lawyers are wrong - and a judgement is issued AND then a lien put on my home - in another State (the lawyers) told me that this can take a while...) - then I may risk a lot of equity in other property(s)?!. Would an LLC protect my assets - assuming all my property (and my home?) would be owned by the LLC? The note is still in my name- I could transfer/sell the home to my LLC. Am I being clear..  ?? TIA.