Getting Paid: A New Look at Fee Collection

Reprinted from:

September 2006

Every business, including The Business of Law®, is driven by a three-part cycle:

• Win the work (the marketing function)
• Do the work effectively and efficiently (the production function)
• Get paid (the collections function).

These three functions are distinct and separate. Most lawyers are familiar with and capable in marketing and production, but they fail to grasp the importance of collections. They feel a false sense of security as they pile up billable hours, but don't realize the danger in the uncollected cash that those hours represent. Bounced checks, failure to receive timely or full payment, client insolvency – these all can ultimately result in a lawyer's bankruptcy.

However, lawyers can control fee collection to a greater degree than they usually believe is possible. When an attorney agrees to perform services for a client, the lawyer and the client are entering into a two-way bargain. The attorney promises to perform legal services that meet or exceed the standard of the community and the expectations of the client, and the client agrees to pay for legal fees and disbursements in accord with the terms of the written fee agreement. Lawyers can take a variety of practical steps to ensure that clients keep their promise.

Defining the Relationship

If the client pays each bill every month like clockwork, the relationship is working. If, however, the client owes a great deal of money and shows very little inclination to pay it, the relationship is clearly on the rocks. Shared expectations, effective communication and dependable follow-through by lawyer and client all define the kind of good relationship that results in collecting a higher percentage of your billings. Despite what some lawyers think, the two are tied together. You truly have a good relationship with your client only when the client's account receivable is up to date. Delinquent accounts generally indicate that the client doesn't respect you, is attempting to hoodwink or undercut you, is dissatisfied or is considering disciplinary action against you.

Perspectives on Debt

In large firms, when such a troubled relationship develops, the overall cost of an individual bad debt to each partner is minimal. Lawyers in small firms or in sole practice see an immediate reduction of take-home pay. Large and small firms alike often continue to work for the non-paying client in the misguided hope that continuing the relationship means getting paid and receiving referrals in the future. However, clients respect firmness and a businesslike approach, and generally do not go out of their way for lawyers they disrespect.

Walking Away

If a fee payment impasse develops, the lawyer cannot ethically cease representation when the client will be prejudiced – for example, by withdrawing within 60 days of a court date. In the ABA's Code of Professional Conduct, Rule 1.16 ("Declining or Terminating Representation") allows lawyers to withdraw if "the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer's services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled." If you try to withdraw without adequate communication on and careful records of the client's billing and payment performance, the result may be a State bar disciplinary action requiring future "involuntary servitude" (or pro bono work) to fulfill your ethical obligations toward the client.

Collection Policy Establishment

Law firms are not the victims of their delinquent clients. Attorneys and law firms cause their own collection problems by failing to establish collection policies, to explain the policies from the start of an engagement, and to enforce those policies consistently during the engagement. Lack of a firm-wide written collection policy can lead a firm to financial disaster. While the collection policy need not be part of the engagement letter's fee agreement, the engagement letter should clearly state the consequences to the client for failure to honor the agreed-upon payment commitment. Your written policy must detail how to keep track of when clients are behind on their payments, and how to contact clients when they are late with payments.

Collection Policy Tips

Assume that every client will be a collection problem. That way, you will be well-armed with a variety of signed—and initialed—agreements, which will demonstrate the client's advance knowledge and acceptance of the costs incurred. It is vitally important that you move quickly to collect any overdue accounts. One study shows that, a bill that is over 60 days past due can still be collected about 89 percent of the time. However, that drops to a 67 percent likelihood of collection after six months, and to a 45 percent likelihood after one year. Train your staff to let you know quickly about who is not paying their bills so that you can take immediate and necessary action

Collections Policy Details

Your collections policy should cover in usable electronic form everything from the beginning of the relationship with the client to the payment of the final bill. Hire a collections manager, or designate a staff person, to handle all the details of the collections policy, including:

• Credit terms (when to inquire about unpaid balances, when to stop work if payment stops)
• A sample fee agreement, to be modified as necessary
• Collection terms, including guidelines on when and how to engage a collection agency
• Incentives for lawyers to have a high collection percentage on the fees they bill (called realization rate) and enforcement actions against those partners who lag on collections (such as withholding compensation, or deducting collection expenses from it).
• When Clients Don't Pay
• Consistent with the Rules of Professional Conduct, stop work for clients who do not pay. That step should focus the client's attention on the problem. Ask the client what he or she would like you to do to resolve a billing dispute. Listen carefully to the suggestion. Generally, price is not the issue with clients. Therefore, lawyers should resist discounting their fees. However, in a collection situation, it is important to do whatever is necessary to resolve the conflict. Clients who argue about over-billing are often just angling for a discounted bill. If, after all other efforts to collect have been exhausted, the client is merely interested in a fee discount, give it. Do it to get rid of the matter—and the client. That way you are not paying collections staff to keep flogging the matter, and are much less likely to be sued for malpractice.

However, if the client has earlier agreed to pay the full amount, do not later cut the fee. This sort of price shenanigan is quite popular during the month of December with clients of large law firms. Clients agree to pay their large bills in order to wangle huge discounts because the remuneration system for partners is based upon how much has been collected by the end of the year. Any bills collected in January do not count for another 11 months. Some of these clients have gotten into the habit of attempting to discount their lawyers' fees for every matter.

Taking Charge

It should be apparent that collection is an active process, and a vital one – the last step that closes the circle in any engagement. The agreement between client and lawyer isn't complete until you get paid. The process only works when you make it work.