Cheapness, Money, Small Law Firms, Solo Practitioners

10 Tips To Avoid Getting Stiffed By Your Clients

If you can't get the money upfront, what CAN you do? Advice from small-firm columnist Carolyn Elefant.

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It’s one thing to say that you bill at $200 or $500 or $1,000 an hour; it’s another to actually collect those fees. Every time a client fails to pay a bill, you’re effectively discounting your overall rate. And while writing off $500 here or there may not seem like much, over the course of the year it can amount to several thousand dollars – which doesn’t take into account the added cost of chasing down clients to collect from them.

Of course, the best way to avoid getting stiffed is to obey Foonberg’s Rule: Get the money up front. Unfortunately, sometimes, you can’t predict the full cost upfront – and if the expected bill is mid-five figures or more, a client simply may not have that kind of money all in one place. Moreover, taking payment up front won’t guard against a client asking for a refund down the line if you haven’t vetted the client properly. So beyond upfront payment, here’s a list of tips to avoid getting stiffed:

1. Make sure the client can and will pay: Sounds obvious, of course, but the first step to avoid being stiffed is to determine whether a client can pay. If you quote a fee that makes a client squirm, explore those concerns with the client. If the prospective client still appears concerned, don’t cut your fee, but instead consider (1) a reduced scope of services (that will serve his needs within his budget and meet applicable professional standards) or (2) turning down the client.

2. Avoid certain clients entirely: Clients who don’t pay their bills often share common characteristics. Many claim that they have a “sure thing” case or that “money is no object.” Some will try to shame you into cutting your costs by complaining that “lawyers are worthless, money-grubbing parasites.” While it’s not necessary to go so far as to request prospective clients’ permission to check their credit report (not a great way to establish a trusting relationship), you should still do as much informal due diligence as you can.

3. Adequate retainer amount: Have the client pay a retainer that will cover the cost of the case and/or compensate you fairly even if client does not pay another cent. And don’t start work until after the check clears. For clients who cannot pay a full retainer up front, set up an “evergreen system,” in which the client replenishes the fund if it reaches a certain amount.

4. Flat fees: Flat fees can help mitigate the risk of nonpayment since you take the money up front. Even so, you want to warn clients about contingencies that might require added cost so there aren’t undue surprises or objections.

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5. Mechanism for getting out: Despite your best efforts, some clients still may not pay up. Plan for that possibility by expressly stating in your retainer agreement that non-payment and/or failure to replenish the evergreen retainer is grounds for withdrawal. A court may not allow you to withdraw, but at least the retainer lays the foundation for you to potentially pull out.

6. Credit card payment: Credit cards are an option for ensuring payment so long as advance credit card payments go into your trust fund. There’s always a possibility that clients can charge back money placed on a credit card, so be sure to keep careful records to show that you’ve done the work claimed.

7. Regular invoicing: Make your bills easy to understand and pay. Include a reasonable description of work performed, and send invoices in a variety of formats — hard copy and electronically with credit card payments optional. Send invoices promptly — not necessarily the day after the job is done, but at least within same month as completion of work. If possible, try to send invoices that match the client’s payment cycles (e.g., if the client pays bills at end of month, send your invoices at that time).

8. Late payment and collection: Put a process in place for quickly addressing late payments and documenting communication with clients. Create a system for setting up payment plans if absolutely necessary, as well as a process in place for initiating withdrawal from the case where clients have not paid. If your jurisdiction permits, put a lien on the file or other mechanism in place to ensure priority over other creditors.

9. You don’t have to sue: Most lawyers avoid suing clients (or their malpractice carrier effectively prohibits them from doing so) because it may invite malpractice claims. If that’s the case, you may still be able to obtain relief by including a clause in your retainer agreement requiring clients to arbitrate fee disputes or present them to a bar-fee dispute panel.

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10. If all else fails, minimize the fallout: Let’s say that in spite of these precautions, your client won’t pay up. If that happens, don’t make the situation worse. For example, if you retained other services — perhaps an expert witness or contract lawyer — with the expectation of passing the costs on to the client, don’t stiff those providers because the client stiffed you. Ultimately, you’re responsible for these expenses and could face an ethics complaint if you don’t pay up. Likewise, if a client stops paying, don’t just stop work hoping that a check will show up. Instead, send warnings and if necessary take steps to withdraw. Non-payment isn’t a defense to non-performance in a legal malpractice action.

Carolyn Elefant has been blogging about solo and small firm practice at MyShingle.com since 2002 and operated her firm, the Law Offices of Carolyn Elefant PLLC, even longer than that. She’s also authored a bunch of books on topics like starting a law practice, social media, and 21st century lawyer representation agreements (affiliate links). If you’re really that interested in learning more about Carolyn, just Google her. The Internet never lies, right? You can contact Carolyn by email at elefant@myshingle.com or follow her on Twitter at @carolynelefant.

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