LLC, lawsuit, and equity in property

[Bienes Raices]

This post is a follow up to a statement made on another LLC thread...it was stated that you should worry more about the amount of equity you have in one LLC's properties, rather than about how many properties you own in a single LLC...

In the event of a lawsuit, how does the creditor obtain the equity? Assuming that you have $10K in equity and the mortgage balance is $60K, does the creditor/court force you to sell the house so that they can obtain the $10K?

[Chris Weiler]

It is my understanding an LLC offers more protection than that. With most judgements the creditor is limited to a charging order. The creditor does not become a member and therefore force a sale of the property. With a charging order the creditor is limited to distributions by the company. As the member of the LLC, you decide when to have distributions. Clearly with a judgment in tow, you are not going to have any distributions. Since the creditor has rights to any distribution they are also often responsible for any tax on income even if there are no distributions. This is why most lawsuits will not ask beyond what the insurance carrier will pay. If they do ask for more, there is often a compromise for much less. All this is another reason why I believe very strongly in using an LLC to hold your properties.