The most stressful part of a law practice is usually getting paid. Unfortunately, it’s easy to sabotage yourself before you’ve even started, if you don’t consider some common pitfalls and how to avoid them:
- Discuss fees at the outset. Carefully screen new clients to minimize the number who don’t pay for your services because they can’t afford your fees.
- Avoid clients with unrealistic expectations. The client who frequently complains or needs constant hand-holding is often the client who is unhappy with your bill.
- Review billing practices. Make sure clients understand time will be billed in tenths of an hour, statements will be issued monthly, and payment is expected within 30 days. Always include a due date on your bill.
- Use written fee agreements to prevent misunderstandings and communicate what will happen if the client does not pay.
- Monitor account receivables closely and establish a collection procedure now. Assuming you generate bills on the first of the month and clients are expected to pay by the 30th of the month, your procedure might be:
- On Day 31, past due clients automatically receive a second billing notice
- On Day 40, past due clients receive a phone call
- On Day 50, past due clients receive a (form) letter, and so on.
- The idea is to establish specific steps that follow a timeline. Remember, these situations rarely get better. If you need to withdraw, comply with the Rules of Professional Conduct. See How to Fire a Client – Dos and Don’ts When Ending Representation.
- Offer incentives, such as a discounted hourly rate or flat fee, if the client establishes a retainer or pays your fee up front. Comply with OSB Formal Opinion 2005-151 if you intend to charge a fixed fee earned upon receipt.
- Consider an early-payment discount. If the client pays your outstanding bill within 10 days, rather than 30, give the client a percentage discount off the total amount due.
- Accept credit cards. Avoid bookkeeping hassles by using a private credit card processor who will take merchant fees only from your business account. Be sure to read and comply with OSB Formal Opinion 2005-172.
- Collect last month’s rent. Require that the client pay a security deposit to be held in the lawyer trust account. Invoice the client as usual. At the end of the case, the security deposit is used to pay the client’s final bill. Alternatively, the funds may also be used if the client fails to pay a monthly invoice. Put this arrangement in writing. Keep in mind that if the client’s funds can earn net interest, you are required to establish a separate interest-bearing account for the client or obtain a waiver of the client’s right to interest. See OSB Formal Opinion 2005-117 for additional details.
- Use evergreen retainers. In this type of arrangement, the client agrees to maintain a specified retainer balance at all times. Your bill should reflect the beginning retainer balance, fees and costs incurred during the month, total funds disbursed from the client’s retainer, any balance remaining, and the amount needed to replenish the retainer to the required amount.
- Consider interest charges carefully. Unless you and the client have entered into an enforceable written agreement to charge interest at a higher rate, you may only charge the statutory rate of 9% on a past-due account. See OSB Formal Opinion No. 2005-97.
- Resist the temptation to modify your fee agreement. OSB Formal Opinion 2005-97 also stands for the proposition that modification of a fee agreement in the lawyer’s favor requires client consent preceded by an explanation of the reason for the change and it’s effect on the client. In addition, any modification must be objectively fair. Meeting this standard isn’t impossible, but it isn’t easy either. If you discover you have made a bad bargain, the best course is to learn from experience and change your fee agreement prospectively with future clients. Otherwise, you may find yourself in the middle of a fee dispute, even if your client initially agrees to the modification.
Think twice before suing a client for fees. The decision is yours, and I certainly understand why lawyers who have never resorted to suing clients before are considering it now. Economic pressures are hard to ignore. Before you take this ultimate step, be sure you’ve considered all the issues, including the possible effect on your PLF coverage.
Copyright 2010 Beverly Michaelis
Excerpted from “Financial Management 101,” to be published on the Oregon State Bar Sole and Small Firm Practitioners Web site.