The following blog post is an excerpt from the MyCase eBook “The Pocket Guide to Launching Your Law Firm.” This excerpt is from a chapter written by Edward Poll. Download the full eBook for free here.
You hang your shingle, you put the word on the street that you’re open for business, and a client walks in the door and signs a retainer agreement. You’re in business! Then, the client hands you your first retainer check. Now what? You need establish a proper money management system, both for business and ethics reasons.
You need an operating account, into which you’ll deposit earned fees and any other income such as speaking fees and payment for any writings you might publish. You also need a trust account. Your trust account must comply with your state’s rules, which typically involves taking a form from the state bar to a bank (most major banks cooperate with the state bar attorney-client trust account programs), and opening the account with an account specialist who understands the proper procedures for setting up a trust account.
Trust accounts are governed by very specific state bar ethics rules, and one of them is that you may not deposit your own funds into the account. It is reserved solely for funds belonging to clients. So, how do you open the account in the first place? Check your bar’s rules for specifics, but there will be some provision allowing you to maintain a small amount of personal funds in your trust account to cover bank fees. So when you open the account, put a nominal amount like $50 or $100 of your own money into the account as an initial deposit. Make sure your trust account records reflect that this amount is your money held to cover bank charges. Replenish it when bank charges are taken out.
It is a very good idea to have your operating and trust accounts at two different banks. While this can at times be inconvenient, it will save you a great risk of clerical errors impacting your trust account. Consider your trust account sacrosanct. You cannot risk anything happening to it, even a “harmless” clerical error. If your operating and trust accounts are at the same bank and a teller inadvertently deposits unearned fees into your operating account, you can be deemed to have co-mingled or misappropriated those funds. The risk is not worth the convenience of keeping your accounts at the same bank.
Your first client hands you a check for your initial retainer. That situation is easy; you take the check to the bank, place it in your trust account, and wait until you earn the fee to take it out. There are other ways to receive payment though. One occurs when you provide clients with your trust account number, and they can deposit directly into your account at a branch. This may seem unsecure, but truly anyone who has received a check written on your trust account (think court reporters, courts, process servers) has your account number. It can be a quick and easy way for a client to pay.
Payment by Credit Card
Credit cards are a convenient way to get paid quickly and easily, albeit a more expensive one due to the fees. It is perfectly ethical to be paid by credit card, so long as you are careful. When you are just starting out, this is probably the last form of payment you will set up unless you are in a practice area where accepting credit cards can increase the volume of business you can bring in.
Credit cards can absolutely be accepted for fees already earned, and the credit card processing can be set up to go directly into your firm’s operating account. The trickier question is what to do with advances on fees, or unearned fees, and advanced costs.
The ethical issues encountered are that when you accept a credit card for unearned fees, the deposit needs to go into a trust account; however, the fees associated with the credit card charge should not come out of trust. Similarly, if a client provides you advanced costs, they also must be in trust. If the fees for these transactions were to come out of the trust account deposit, then the client would be paying the credit card processing fees and won’t get the full benefit of the amount deposited with you. Plus, a typical merchant credit card processing agreement allows the credit card processor to withdraw from the merchant’s account should the customer dispute a charge on his card (called a chargeback). This subjects the trust account to invasion by the processor and risks overdrafts on the trust account.
Thankfully, credit card processors recognized that an entire industry needed a specialized solution, and several developed products to meet lawyers’ needs. All fees are withdrawn from your operating account, and deposits can be made into either account. So, if your client asks you to charge their credit card for earned fees, you can direct that the deposit go into the operating account, with the fees withdrawn from there as well. If the client pays you an advance, the deposit can go into trust, with the fees coming out of the operating account, allowing you to pay all fees using the firm’s money, thus ensuring that the client gets the benefit of the full deposit.
Credit card companies catering to lawyers may also institute dispute resolution procedures before any chargebacks are issued, thereby helping protect the sanctity of the trust account.
Business Solutions to Increase Odds of Payment
One of the biggest complaints solo lawyers have is the difficulties they face in getting paid. As you set up your practice, there are a few things you can do to help increase the odds of getting paid for the work you do.
Collect Fees in Advance
Getting paid before you have done the work to earn the fee is a great idea, though it’s easier said than done for many lawyers. While it can be hard to ask for upfront payment at first, it does get easier as you get used to the business practice, and once you get burned by a non-paying client, you will find it easier to ask.
One way to collect in advance is to ask for an upfront deposit toward your hourly rate. You can estimate a reasonable number of hours to initially invest in a matter and ask the client to pay for those hours up front. When the first bill comes due, you already have those hours paid in advance and can apply the deposit to the invoice.
When the client pays you these advanced fees, you deposit the funds in your trust account. When you have earned the fees and you prepare an invoice for your client, you then withdraw the funds from trust and deposit them into your operating account, simultaneously sending an invoice to the client reflecting the payment from trust.
A variation on the idea of advanced fees is an advanced payment of the final invoice on a matter. This is like paying the last month’s rent when you move into an apartment. The client will pay you some sum that you estimate to be a reasonable deposit on your work. You deposit that amount into your trust account, and each month when an invoice is due you send the invoice to the client to be paid in full. Any payment received will go directly into your operating account because it is already earned. Then, when the client’s final invoice is prepared, you apply the funds held in trust to the amount outstanding, write yourself a check from the trust account and deposit it into your operating account. If the client still owes additional money, send them a bill, or if their deposit exceeds the final invoice, send them a refund.
Each of these practices is permissible under ethics rules; the only ethical question that remains is how to treat the funds once you receive them–and you cannot go wrong depositing them into trust.
Establish a Billing Department with Procedures
As much as we would all like to be paid in advance at all times, in reality you are likely to have some outstanding receivables. In order to increase the chances you will be paid, and paid on time, set up a billing department with proper billing procedures. This is true even if the billing department is just you.
At the outset, it’s important to note that a billing department should have its own email address from which invoices should be sent. And, your billing department should prepare and send invoices on the same day every month, whether it’s the first business day of the month, the last day, or the 15th. Just pick a day and stick to it.
Your billing department should have a practice of sending out reminders on unpaid invoices and offering payment arrangements when appropriate. If you have a high volume practice, you will more likely need a specific template and rules for when payment arrangements are offered. In a smaller volume practice, you can more easily determine when to offer arrangements such as installments or discounts for full payments.
When you abdicate responsibility for invoicing to a billing department, you take some of the difficulty out of asking to be paid. You are no longer the person sending the invoice to your client and reminding them that the bill is past due. That responsibility now belongs to the billing department. That department can send a reminder to pay the bill on the same day that you have a perfectly pleasant conversation with your client on the substantive issues in their matter with no mention of the late bill.
Know Your Options When You Are Not Paid
It is helpful to know what you can do if your client does not pay. Knowing these options will help you rein in the extra time you might spend on a matter before needing to pursue one of these avenues, thereby reducing your uncollected fees.
1. Rights Given Under Retainer Agreement
As you consider what steps can be taken to get your client to pay, first check out your rights in the very agreement your client signed. If you followed an approved state bar form when you drafted your retainer agreement, it likely contains such dispute resolution clauses as mandatory fee arbitration or mediation. If not, you may be able to sue directly on a breach of contract theory unless your state law mandates alternative dispute resolution even when not called for in the retainer agreement.
2. State Dispute Resolution Procedures
If your fee agreement lacks reference to dispute resolution procedures, your state’s statutes may provide this structure instead. States typically offer some form of fee dispute via alternative dispute resolution; the question will be whether it is mandatory or voluntary. Sometimes the process is mandatory for the lawyer and voluntary for the client.
3. Collection Agencies
Sending a bill to an outside collection agency is one option, but generally an unfavorable one. It can be very costly to send a bill out for collection, particularly if it is far enough past due that you would even consider it. This is really a last resort when none of you other methods for collecting has worked.
You can also seek withdrawal from the matter. Whether you can walk away from a non-paying client or not depends on the type of matter and the stage of proceedings. If it is a litigation matter, you will need permission from the court to withdraw. In a transactional matter, you may not prejudice your client by your withdrawal. In any type of matter, you may not threaten your client with adverse consequences or threaten not to appear on your client’s behalf on short notice if they fail to pay.
Billing For Accuracy and Profit
All of the infrastructure to help ensure payment will be useless if you do not send out invoices each month. Crucial to a profitable practice is one filled with billable hours. Make sure that when you are setting up your bank accounts and credit card processing, you also set up a billing system.
An accurate and consistent billing system not only helps you get paid, but it also keeps you in line with your ethical obligations pertaining to money. For instance, you must withdraw from your trust account earned fees as soon as practicable upon earning them. You cannot leave a deposit lingering in trust after you have earned it because a trust account is only for holding money belonging to someone else; once you have earned it, that money becomes yours and leaving it in trust is co-mingling.
Your client also has a right to current information on their matter, including the amount of the bill. If you fail to keep your client informed and they learn six months into a matter that the bills are far higher than they anticipated, you could have an ethics issues on your hands along with a major collections problem.
In addition, timely recordkeeping of billable hours and regular billing to clients will increase your profits; if you attempt to reconstruct time records after the time was worked, you are likely to under bill your time. Clients are also more likely to pay if the time for which they are being billed was just recently spent, as they will probably remember the work you did quite specifically.
Learn Your State’s Ethics Rules
As a final point on all things money, check your state bar for resources to keep abreast of the rules surrounding money. Trust accounting is not the only money issue that is impacted by ethics rules, and knowing your bar’s position on credit cards, advanced fees, fee dispute resolution, and all other similar issues is extremely valuable. Your bar may offer CLE ethics courses on money-related matters, and these can be excellent resources for learning the basics of staying in compliance.
Download the rest of this eBook now to learn the ins and outs of starting a law firm from budgeting to launching a website, leaving no stone unturned.