Manish C. Bhatia

A Brief Explanation of the Difference Between Illinois and Delaware Creditor Protection Laws

Illinois: Illinois law allows for both charging orders and foreclosure upon the member’s interest.

805 ILCS 180/30 20(b) – A charging order constitutes a lien on the judgment debtor’s distributional interest. The court may order a foreclosure of a lien on a distributional interest subject to the charging order at any time. A purchaser at the foreclosure sale has the rights of a transferee.

Delaware: Delaware law does not allow for foreclosure upon the member’s interest.

6 Del. Code Ann. § 18-703(d) – The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of a member’s assignee may satisfy a judgment out of the judgment debtor’s limited liability company interest.

Charging Order vs. Foreclosure

Charging Order: If a creditor is granted a charging order against the debtor’s LLC interest, the court charges the debtor-member’s interest with the amount owed to the creditor. Once the debt is satisfied, the member returns to full rights in his interest.

Foreclosure: If a charging order does not result in the debt being paid off, often because the LLC has stopped making distributions because of the lien/charging order on one of its members’ interest, the debtor may move for foreclosure in Illinois, but not in Delaware. Upon foreclosure, the debtor-member is fully divested of his membership interest. The debtor will lose all financial benefit of being a member, including his rights upon liquidation.