Member Voluntary Bankruptcy

I'm a member of an Arizona LLC. What happens if I file for bankruptcy?

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Unless otherwise provided for in the operating agreement, a person ceases to be a member of an Arizona LLC upon filing a voluntary petition in bankruptcy. See AZ stat §29-733(4)(b). In Chapter 13 bankruptcies, the debtor retains possession of his or her assets, therefore, there cannot be a collection action by your creditors against the LLC interest unless the plan is not approved or your fail to complete it. In a Chapter 7, the bankruptcy trustee takes possession of your assets. However, Arizona law provides the following regarding the rights of a creditor against an LLC interest after withdrawal:

On any event of withdrawal of a member, except as otherwise provided in an operating agreement, the withdrawn member and the withdrawn member's personal representatives, successors and assigns do not have the right to receive any distribution by reason of the withdrawal but do have the rights of an assignee of the withdrawn member's interest in the limited liability company to receive distributions with respect to the member's interest during any continuation of the business of the limited liability company and during and on completion of winding up less any damages recoverable against the withdrawn member if the event of withdrawal violated an operating agreement. AZ stat. §29-707.

What this means is that the bankruptcy trustee (in the case of a Chapter 7) will receive a charging order against your LLC interest requiring the LLC to turn over any distributions payable on your interest.

To sum up, absent an operating agreement giving a different result, you shall cease to be an LLC member upon filing for bankruptcy. In the case of a Ch. 13, you shall retain an interest in the LLC but only to distributions payable to that interest. In the case of a Ch. 7, the bankruptcy trustee shall become the owner of your interest in the LLC and the bankruptcy estate shall receive distributions from the LLC.