Foreclosure Of Charging Order Lien

Topic Foreclosure TopicsExemption

While foreclosures of charging order liens are very rare (because it rarely improves the creditor's position, and may in fact worsen it), when a creditor does move to foreclose there is often confusion about what happens.

The confusion manifests itself in the creditor (and sometimes the court) thinking that foreclosure is of the entity itself, and not merely the charging order lien. In fact, the purchaser of the interest at the judicial sale merely puts the purchaser into the position of an involuntary assignee, without any management or voting rights, but now the purchaser becomes liable for the Form K-1 distributions of taxable income, i.e., no better rights than before, but now you get to pay tax too.