In this blog article, we’ll discuss one of the biggest stress-inducers for a small law firm: the client who fails to pay.
If you have ever tried to get a new law firm off the ground, you know how hard that job can be.
You need to bill hours to generate revenue, but as a start-up business, many founding attorneys find themselves wearing multiple non-billable hats: marketing director, client liaison, and accounts receivable professional among them.
That’s already tough enough when things are running smoothly. But what do you do if a non-paying client interrupts the cashflow on which you’re relying?
No one needs that kind of stress. That’s why we’ve put together this outline of things you can do when a legal client isn’t paying their bills.
#1: Consult the retainer agreement
One of the most important things you can do for yourself as the founder of a small firm is to have valid retainer or fee agreement templates in place before you ever take on a client.
This is surprisingly easy to set up. Many state and local bar associations provide up-to-date sample agreements free of charge.
In most states, fee agreements must delineate how the law firm will bill the client and how the client is expected to pay the law firm. They may also set forth arbitration requirements, interest to be paid on past-due accounts, and how (if at all) retainers or deposits are to be applied against an outstanding bill.
In other words, your retainer agreement will largely dictate the entire billing relationship.
So, the first thing to do when you become concerned about a client who is not paying is to turn to their specific fee agreement for guidance on how you should proceed. You’ve already set those terms, and you’re both legally bound to follow those steps.
#2: Communicate clearly in writing
The next thing you should have in your small-law-firm arsenal is a variety of collection letters.
For example, you could have templates in place for clients whose payments are one day late, 10 days late, 30 days late, and so on. You can even start with a boilerplate template that you find online.
Having these letters in template form will save you from having to reinvent the wheel each time you’re faced with a late payment.
Among other things, your collection letters should refer back to the specific paragraph(s) in the fee agreement that dictate how and when the client is expected to pay your firm. It should also define the next steps and on what date you will take action.
Be sure to check the collection laws in your state to make sure that your efforts to collect that debt are compliant.
#3: Attempt oral communication between attorney and client
Humans are funny creatures.
Some people, for example, will ignore multiple written attempts to collect overdue payments, but respond immediately when faced with a live phone conversation.
Likewise, some people will ignore calls from your accounts receivables department, but pay immediately when they get a call from an actual attorney.
So, how do you make these difficult calls?
First of all, be prepared before dialing the phone. Have all pertinent documentation in front of you and have a general understanding of when the bill was due, whether the client has made partial payments, whether the client contests the amount owed, and so on.
Also, try to remain friendly but firm with the client.
There may be many valid reasons why the client hasn’t paid (serious illness, bills sent to the wrong address, etc.) and you don’t want to lose future business from a good client if the late payment is the result of a simple misunderstanding.
#4: Consider sending a formal demand letter from another law office
As an attorney, you likely write demand letters on behalf of clients all the time.
In fact, one of the main reasons many people (and businesses) love having an attorney on retainer is because when an attorney sends a formal demand letter for payment, even the largest overdue bills tend to get paid quickly.
If this works for your clients, why can’t it work for your firm as well?
Ask one of your colleagues at another firm to write the demand letter on your behalf — perhaps you could perform this service for each other’s firms. When your client sees that another firm is involved, there’s a good chance they’ll sit up and pay attention.
#5: Fee arbitration
There are a lot of reasons why, as a small law firm, you don’t want to regularly sue your clients for non-payment.
For one thing, if you file a lawsuit, you immediately open your firm up to counterclaims from the client alleging malpractice or other improprieties.
You also don’t want to get the reputation as a firm that sues its own clients. As you can imagine, that’s definitely not good for business.
Fortunately, many states have fee arbitration programs. In some states like California, fee arbitration is even mandatory if the client requests it.
These programs are no- or low-cost, and the arbitrator typically handles these types of disputes all the time. As a consequence, resolution tends to be fair and usually comes swiftly.
#6: Weigh your remaining options carefully
We’ve already discussed the risks of filing a lawsuit against your client. You might be set against that idea, and that’s okay.
But if that’s something you’re not willing to do, what are your remaining options should fee arbitration fail?
Obviously, the least attractive option for any small business is to ignore the non-payment. Nonetheless, it is an option.
If you do that, however, be sure to analyze the entire situation with your staff to see if you can tweak any procedures going forward to ensure that this doesn’t happen again.
You can also consider a payment plan with the delinquent client.
The problem with payment plans is that now you have to monitor multiple payment obligations over time. That’s not ideal, but it might get you paid.
Finally, if the non-paying client is someone you’re still representing (in the midst of a lawsuit, for example), you need to analyze whether you have grounds to withdraw as counsel.
ABA Rule 1.16 allows lawyers to withdraw if a client does not abide by the terms of their agreement, and that includes payment terms. However, you must take steps to mitigate the risks to that client, so proceed with caution.
Non-paying clients are definitely frustrating, but with a solid plan in place for dealing with them, you can increase your chances for collection.
