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Default (or the failure to pay one’s obligations in time) triggers the right of repossession by the creditor. Try missing a couple of payments and you may expect your creditor to close in on the collateral you have provided to secure your loan. Recently, there has been a movement to allow a creditor with an unsatisfied charging order to get a foreclosure of the debtor partner’s interest. A foreclosure means that the court allows a seizure and a sale of the debtor’s partnership interest. Just like with a charging order, the purchaser of the partnership interest would not become a partner and would not have any right to interfere in partnership affairs.
A creditor still would not have any right to seize any of the assets of the partnership. The difference between a charging order and a foreclosure is that a creditor with a charging order would be entitled to distributions only to the extent of the judgment. A creditor who has foreclosed on a partnership interest would be entitled to the debtor’s share of distributions without regard to the amount of the judgment. For example, a creditor with a huge judgment must release his charging order when he has been paid the full amount of the judgment. If the creditor instead forecloses on the partnership interest, he will be entitled to all distributions, regardless of the amount, for the life of the partnership.