Getting What's Coming to You: a Primer on Billing and Collecting Fees

by Terri Olson

As a group, lawyers have notoriously poor luck in collecting fees. Many firms are content if they can get 90% of what is billed out. War stories about deadbeat clients and the difficulty of getting even the better ones to pay bills on time are sure to be popular at any gathering of attorneys. While "how to collect fees" always piques interest, the process of billing clients and talking about money with them may not seem as exciting or relevant. Billing and collecting are, however, not two separate entities at all: just different stages of the same process. When trouble comes down the line after you've presented your demand for payment it can usually be traced back to a failure at the initial stages.

If there is a golden rule that applies to the billing process, it would have to be "No Surprises." Your clients don't want to have sticker shock over the amount of your bill when it's presented, nor do they want to be surprised at what your payment schedule is, or how much you need up front. This, of course, means that it's going to be necessary to lay things out in the open with your clients at the beginning of the representation, something many lawyers are loath to do.

First of all, do not be offended or surprised when people tell you they can't pay what you're asking or attempt to dicker. On the other hand, do not feel that you must give serious consideration to this, either. Most people believe in their hearts that lawyers are far too rich, and may consider your statement of fees as an opening gambit to which a counter should be made. To mix metaphors wildly, the ball is now in your court. It is your responsibility to convey to the client that these fees are fair and set, not subject to bargaining. The client can then either accept or leave.

A valid point frequently brought up by litigators who bill by the hour is that they don't know what the total bill is going to be, so how can they tell their clients? Newer lawyers may be able to get away with this argument, but those who have been in practice for some time will start to have a feel for the range especially if they have taken advantage of the many accounting software programs available over the past decade. What is critical, though, is simply that the clients know as much as you do. If you know the average range for this matter, tell them. If you haven't a clue what the grand total will be, let them know and explain why: we don't know how the other side will react; we can't predict what bills the investigators will run up, etc. Most clients object more to feeling that they were left in the dark or that the lawyer was "hiding things from them" than they do to the actual dollar figure.

If you wince at the idea of all this frank talk about money, consider the following: if your client can't pay for your services or is unpleasantly surprised by your rates, you will have an awkward conversation with her. If you don't communicate well at the outset, you will simply have this unpleasant conversation after you've done the legal work. Which would you prefer?

At the same time you explain to the client what your fee is, you will have to determine how much of that fee the client must pay up front or as a retainer for your services. The ideal situation is, of course, to get full payment up front. This may, in fact, be the only way to proceed in certain types of cases. For example, conventional wisdom has it that in criminal, family, and bankruptcy matters, the money you see at the outset is frequently the only money you will ever see.

For other matters (or if you're simply feeling generous), use the following rule of thumb: try to get a retainer at least equal to two months' average billings for this type of matter. Why two or more? If you get a smaller retainer, one that's exhausted after a month, you'll probably not send a bill until after you've done more work for the client. That means your bill goes out at the end of the second month, and if you're lucky, you get payment at the end of the third. A higher retainer means that you haven't spent 30-60 days "floating a loan" for your client. This is especially important if the case has numerous costs associated with it.

If your client says, "I can't pay it all now (if it's a flat fee)" or "I can't give you a retainer (if you're billing on an hourly basis)", but adds "I'll pay you the rest later," do not be shy about asking further questions about your client's ability to pay for your services. For example, let's say you've agreed to do a Chapter 7 for a client, and it's clear from the financial information provided that she's flat broke. She offers to pay you half of your fee now and half later. Where is this money going to come from? Inquiring what about the client's financial status is going to change so that the bill can be paid is not rude, but prudent.

This may also be a good time to point out to the new practitioner that that one of your chief fears pressing clients about their ability to pay and your need for up-front payment will make them walk out the door is less of an issue than you might think. It's true that if you insist on high retainers, proof of ability to pay, or credit checks, some potential clients will not want to retain your services. However, it's not true that you will lose many good, paying clients that way. Any lawyer who has been in business any time at all will tell the "newbie" that clients who argue about money and insist they're too poor to pay you are more likely to be trouble in other ways as well.

If you agree to bill your clients as the matter progresses, try to follow these guidelines:

Bill promptly as soon as the work is done and regularly. Don't send irregular bills every few months. Even if no work was done in a billing period, send a "status" statement.
Don't wait until the client's retainer is exhausted before billing. Send a statement indicating work done even if no payment is due. However, take care not to let the retainer amount drop to zero: ask for payment (replenishment of the retainer) as soon as the retainer drops to what you'd normally bill in one month.
Send all bills by the time the representation is over; if possible, all payments should be received by that time
Realize that your bills can be a primary means of communication with your client. Treat bills not just as demands for money, but as vehicles for describing all that you've been doing on the matter. Studies show that detailed bills are more likely to be paid than are summary bills.
Include language that clearly states when the bill is due and what the client should do if he or she has a question about the bill.
Construct bills that are easy to comprehend. If, for example, the client has funds remaining in trust that have been applied to the current bill, and so there is no balance due, don't hide this information on the back page. Divide fees from costs, and clearly show any discounts or write-offs.

What about payment plans? There is a distinct difference between billing a client for current legal work and devising a payment plan for the client. The chief distinction is that in the former circumstance, the client pays as the work is performed; therefore, if you bill regularly and follow up on your accounts receivable you can easily see whether he is prompt and responsible with payments and adjust your expectations or your work if he is not.

A payment plan exists as a way for someone who can't otherwise afford a service to pay bit by bit after the work is completed. Lawyers should avoid getting into this type of arrangement. If you accept payment plans, someone for whom you provided a legal service will be responsible for paying for that service long after he or she has probably forgotten the value of what you did. Think about it. If you are paying for a refrigerator or a Jeep on time, you have a reaffirmation of the value of what you're paying for every time you get out a soda or climb behind the wheel. Your client has only memories. It is human nature for the perceived value of the service to diminish over time, while the aggravation of required payment remains or increases. You also have little to use as a "stick" except for threatening suit: you've already done all of the work. What are you going to do: repossess the divorce?

If you must accept payment plans, here are some guidelines for making them less troublesome for you and for the client:

Make them as short as possible. You really don't want to superintend a $20 a month payment over the next six years.
Charge interest. Give your client a palpable incentive for paying off early. If your client comes into a little money and has a choice of paying your balance or paying off another debt accruing 18% interest, what do you think will happen?
Try to provide a continuing service to all former clients in the form of a newsletter or occasional letter about changes in the law that may affect them. The ongoing bills will be more palatable if accompanied by useful communications, and your client will be more likely to remember you as a lawyer, not a creditor.
Secure the debt if possible.

Follow up on any past-due payments promptly. It's not reasonable to conclude that a client who has been allowed to accumulate a year's worth of legal debt without a word from you will understand that you now feel payment is a priority. If a client gets behind with payments, make sure you have systems in place to bring this to your attention immediately. A time and billing program that will print out an aged accounts receivable report is the easiest way to handle this. Client who have not paid should be quickly reminded that payment is overdue, but also given an opportunity to explain why they have not paid: was there a problem with the service? Is the bill unexpectedly high?

Given the difficulties associated with billing and collecting, many firms are turning to credit cards as a payment method. If you like the idea but don't want to go to the trouble of gaining merchant status with a bank, invite clients to write you check advances off their credit cards. If you do accept plastic, make sure your clients are aware of this fact far too many firm take credit cards but don't have any indication in their waiting areas or on their bills that this is available. Do not accept credit card payments for money that is earmarked for your trust account. Credit card receipts go into a separate account set up by your bank (or whoever else authorized your merchant status) and can be frozen in case of a problem. Obviously, this would place you in potential violation of several trust accounting rules.

What if all your efforts fail, and the client still won't pay you? If you feel tempted to sue a client for nonpayment of fees, remember the following:

Your client may very well register a complaint against you in response. Look again at the file. If it contains anything that could be used as the basis for a grievance, or if it lacks documentation to protect you, think again before filing suit.
At this point, you're probably quite angry and resentful towards your client. As you well know as a lawyer, strong feelings can affect objective analysis of the merits of a suit. Is it really going to be worth your time and trouble? Would you advise a client walking in the door to sue in a similar situation?
You may have other alternatives you're not aware of. You can, so long as no confidential client information is released, refer the account to a collection agency. Collection agencies are often better at what they do than you would be, and generally no additional firm outlay is required for their services.
Ask yourself if the future goodwill of this client is at all necessary to you. By this time, you probably won't anticipate future business from the client, but what about referrals?
If you were suing to collect a debt on behalf of a client, you'd evaluate whether the debtor was judgment-proof as a matter of course. Don't forget to do the same here: suing a client will cost you time, money, and good will. Never put yourself in such a negative position without a strong likelihood of significant gain.

The following books available from the LPM library may also shed more light on this complex subject:

Beyond the Billable Hour
How to Draft Bills Clients Rush to Pay
Improving Accounts Receivable Collection
Innovative Billing Solutions
Win-Win Billing Methods

To check out one of these publications, contact the Law Practice Management Program at 404-527-8770.

Terri Olson is the former Director of the Law Practice Management Program.

This article was originally published in the Georgia Bar Journal, August 1996, Vol. 2, No. 1, p. 47