Legal Definitions - charging order

A charging order is a legal tool used by a creditor to collect a debt owed by an individual partner from that partner's financial share in a partnership. Rather than seizing the partnership's assets or interfering with its operations, a court issues a charging order directing the partnership to pay any money or distributions that would normally go to the indebted partner directly to their creditor. This continues until the personal debt is fully satisfied, allowing the partnership to continue its business undisturbed while ensuring the partner's personal financial obligations are met from their share of the partnership's profits or capital.

Here are some examples to illustrate how a charging order works:

• Example 1: Personal Loan Default

  Dr. Emily is a partner in a successful medical practice, which is structured as a partnership. She took out a personal loan to purchase a new home, but due to unforeseen circumstances, she defaulted on her payments. The bank that issued the loan sues Dr. Emily and obtains a judgment against her. To collect the debt, the bank then applies for and receives a charging order against Dr. Emily's interest in the medical practice.

  How it illustrates the term: The charging order compels the medical practice to redirect Dr. Emily's share of the quarterly profits and any other distributions directly to the bank until her personal loan debt is fully paid. The medical practice itself continues to operate normally, seeing patients and managing its finances, without its assets being seized or its operations disrupted by Dr. Emily's personal debt.

• Example 2: Unpaid Child Support

  Mark is a partner in a thriving real estate development partnership. He has fallen significantly behind on his court-ordered child support payments to his ex-spouse. After attempts to collect the arrears directly fail, his ex-spouse's attorney petitions the court for a charging order.

  How it illustrates the term: The court grants the charging order, legally requiring the real estate partnership to send Mark's regular monthly profit distributions directly to his ex-spouse to cover the outstanding child support. This ensures Mark's personal legal obligation is met from his partnership income, without impacting the partnership's ongoing development projects or its relationships with other partners.

• Example 3: Business Debt from a Separate Venture

  Sarah is a partner in a popular restaurant partnership. Separately, she owned a small catering business that unfortunately failed, leaving her with a substantial debt to a food supplier. The food supplier obtains a court judgment against Sarah for the unpaid invoices. To collect on this judgment, the supplier seeks a charging order against Sarah's interest in the restaurant partnership.

  How it illustrates the term: With the charging order in place, the restaurant partnership is legally obligated to pay any future capital distributions or profit shares owed to Sarah directly to the food supplier until the catering debt is settled. The restaurant's daily operations, its inventory, and its other assets remain untouched, demonstrating how the charging order targets only the individual partner's financial stake, not the partnership's core business.