Published: 2008-03-26

How to Start a Law Firm: Collecting Debt from Your Law Firm Clients

Collecting debt from your law firm clients is a painful reality of doing business. However, the pain can be reduced if you institute a process and procedure for collecting debt.

9516225 Scenarios

A client's failure to pay a bill does not necessarily mean that there is a dispute or bad relations with the client. When thinking about collecting debt, keep in mind that clients often simply forget to pay your bills. In this first instance, a polite reminder is all that is needed to get the client to pay.

Other times, the client has questions about the invoice, but may be too busy (or simply forget) to address it. In these instances, a letter or email is a good way to start a dialogue. This client communication should include the past-due invoice and a note that politely reminds the client of the agreed-upon payment terms and the address to which payment can be sent. It should also provide an invitation to answer any questions they might have regarding the invoice.

The third scenario is when the client does not intend to pay your invoice. This intent can be premised on objective or subjective grounds. It is very important to understand these grounds so that you can then plan and take appropriate next steps. In these circumstances, you, as a small business owner, have to put on your Customer Service hat. Be aware that, at this point, the client relationship may still be salvageable.

9516225 Be Proactive

Address the issue of client collections before it even becomes a problem by clearly structuring your fee and representation agreements. When signing the fee agreement, make clear to the client all details of your payment terms. Describe the types of payment you accept (cash, check, credit card). Outline when you expect to be paid (net 30, net 45, net 60).

Recognize that in many circumstances, your representation of the client will take several months. If you are continually providing services throughout this time period, it is wise to issue periodic invoices, for example every two weeks or month. That way, if a serious non-payment issue occurs during representation, you have the option of: 1) temporarily or permanently stopping work, or 2) figuring out the least costly way for you to conclude the matter. In come cases, especially if litigation is involved, you may need to petition the court to remove you as the client's attorney of record before your can officially stop advocating on the client's behalf.

If you client is a business, you may need to accommodate its internal accounting procedures by accepting a different pay schedule than you are used to. You may also be required to register yourself as an approved vendor within the client's accounts payable system. Very often, delays in payments can be directly tied to an accounting department that has rigid procedures which take time to work through.

Also be sure to detail the process for resolving payment disputes. Many State Bars, including New York and California, have Attorney-Client fee dispute resolution programs, some of which are mandatory if so elected by the client. Be sure to investigate this issue with your state bar.

9516225 The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCA) prohibits debt collectors from using unfair, abusive or deceptive practices to collect a debt. However the FDCA only applies to "debt collectors", defined as those who regularly collect debts. If your law firm is regularly engaged in debt collection as a practice area, you should be familiar with the FDCA rules. If your firm does not regularly collect debt as part of your practice, this law would most likely not impact your efforts to collect debt from a delinquent client.

9516225 Collection Calls

When past due debt ventures into the third category -- where clients believe there are valid reasons for nonpayment -- you will have to reach out and discuss the issue with the client. Here are some things to keep in mind as you do so:

9516225 Prepare Yourself

Before calling a client about an over due invoice, make sure you have the client's file, including the fee agreement and past due bill, and the ability to make notes. You want to make certain that you are able to respond to any questions they may have about the scope of work and your services. Also, be mentally prepared to politely but firmly ask for your money. This can be more difficult than it seems, especially if you've known your client for a while.

9516225 Converse with the Client

Don't talk down, threaten, or issue ultimatums to the client. Remember, you're trying to continue the relationship (in most cases). Ask the client to explain the reason for non-payment. Does the client have a reasonable basis for nonpayment? Is there anything reasonable you can do to assuage the client? Again, be sure to have a pen and paper to make notes. Put the notes in the client file for future reference. If possible, stay flexible and try to take the high road. If the client is being unreasonable, reiterate the payment dispute procedure outlined in your fee and representation agreement.

9516225 If All Else Fails

If the client demonstrates further unreliability, either by additional failure to pay or return your calls, you should send a final demand letter that outlines: your rights as a creditor; their rights as a debtor; the specific time they have to make payment; and the actions you will take if they do not remit payment. Most often, these actions can include commencing an action to collect the debt, or turning their account over to a debt collection agency, both of which may negatively impact their personal credit.

9516225 Bad Debt

If the dollar amount owed to you is relatively small, it may not be worth your time to file a lawsuit and then collect the judgment. Calculating how much debt to walk away from will involve the specifics of your situation. Instead of filing suit, you may want to contract with a commercial debt collection service and write it off as a business bad debt on your law firm accounts.

According to the IRS, "To deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you are a cash basis taxpayer, you may not take a bad debt deduction for money you expected to receive but did not (for example, for money owed to you for services performed, or rent) because that amount was never included in your income." If you qualify, your law firm could deduct its bad debt from its gross income when calculating its taxable income. These bad debts stemming from business may be deducted in part or in full. Be sure to retain proof of this debt for tax purposes.

9516225 Conclusion

Collecting debt from your law firm clients is not a pleasant task, however it may be vital to the sustainability of your law practice. By being proactive, many routine debt collection issues can be avoided, while more serious debt issues can be resolved in a prompt manner.