GPSOLO July/August 2010
How to Deal with Deadbeat Clients
By Darrell G. Stewart
Experienced attorneys typically have stories about the grateful client who reliably sends a payment every month for two or three years after the representation is concluded. Sadly, I would suggest that these clients are the exception and not the rule. You cannot construct your business policies and procedures assuming that everyone will follow that best-case example. Experienced attorneys tend to have more stories about ungrateful clients who fail or refuse to pay after the representation is concluded. It is therefore vital that you analyze this group of nonpaying clients and identify how to maximize the potential for getting payment from them—and how to avoid these clients in the first place.
Attune Your Deadbeat Radar
If your client really is a deadbeat, the problem is largely a matter of poor screening on your part. Why did you agree to represent this client in the first place? Modify your intake procedures and requirements to cut down on similar circumstances in the future. Learn to look for red flags and add requirements to eliminate the clients who are true deadbeats. From a business standpoint you are making a credit decision if you work in advance of payments received. For this reason, some law firms structure their intake to investigate a potential client’s creditworthiness as part of their determination of whether or not to represent that individual or business. Believing in your client is a good thing, but accepting cases where you are certain of payment is much preferred.
Another way to steer clear of deadbeat clients is to introduce the topic of your fee right from the start. If you are not focused on getting paid from the beginning of the attorney-client relationship, then you might not get paid at all. Payment is and should be a major consideration when evaluating a potential client—so don’t be shy about discussing the topic up front. To remind yourself of the stakes, put your favorite picture of your family where you can see it when having this discussion. Alternatively, put a picture or promotional brochure featuring the place where you want to retire or vacation: a golf course, a lake, a mountain, a cruise ship. The picture will remind you of what you could do with your time rather than work on a client’s case for free.
Reluctant Payers vs. True Deadbeats
Improvements to your screening process should help in the future, but what about right now? Once you have an accounts receivable—an unfunded client bill that cannot be paid from a retainer—you must weigh the time and resources you’ll expend chasing the money against the likelihood of recovery. Ask yourself why you are not getting paid. Is the client simply a deadbeat, or are there things you could do to encourage payment?
I believe that getting paid up front is the best approach, but if that is not possible, try matching the work to the payment stream. Billing early and often assists in identifying the individuals or companies that are going to be a problem and allows you to modify the pace of your work—or in some cases stop the representation entirely before the unpaid bills pile up.
There are certain changes you can make to your billing systems that will help with all but the most inveterate of deadbeats. Having a short period for payment after billing and a quick follow-up typically brings in more revenue than waiting 60 or 90 days to call. Sending your bills by e-mail may make for faster payment, and having more options available for payment (e.g., credit cards or online web presence that allows click-through payment) has proven helpful in spurring quick collection.
Anecdotes abound of once-grateful clients whose appreciation for their lawyers’ work declines precipitously after that work is completed. Your clients may call you a genius the moment their case is resolved, but six months later they may decide that a trained monkey could have easily achieved a better result. So bill early and often, preferably against an evergreen retainer. If you get paid while the appreciation is high, both you and your client are happier.
When clients do fall behind on payment, try having a legal assistant or another attorney in the firm call to cross-check on the billing. This approach helps circumvent the unwillingness of some clients to discuss payment directly with the lawyer working on the case with them. This approach also insulates the lawyer from being the collector, which may be of value to some practitioners. Taking the step of having someone else call means that the caller needs to be trained and sensitive to the nuances of both the representation and potential causes of problems.
Although I have had some clients communicate with a legal assistant when they might not as easily bring something to my attention, my personal approach as a solo is to be rather direct on the issue. If you call your client directly, you can listen carefully to determine what has caused the slow payment. Consider this script: “Joe, I was reviewing my records and noticed that I have not received payment on my bill dated January 19, 2010. I am calling today to see if I need to resend it or if you had a question that you needed answered before remitting payment.” Having directly stated the purpose of the call, I try to listen carefully. Besides answering any question that results, which may take care of the payment issue, I am also trying to classify the cause. Try to suspend judgement about the client and just listen carefully to see what is going on.
Sometimes the client is slow to pay attention to the bill but is willing to pay. Clients legitimately have other things going on in their lives, from busy travel schedules to illness to a host of other concerns. Calling can sometimes result in a new client matter, but even when it does not, true expressions of concern and empathy with the client can encourage the client to pay attention to your billing. Try to fix a discrete date to call back or follow up, or even better, gain a commitment for a firm date when the billing will be addressed.
Sometimes clients have an issue or question that needs to be addressed before they will pay. A reluctant client may become willing to pay if you handle the call correctly. At times this is just a matter of reminding the client of previous discussions or readdressing appropriate expectations for the client matter.
In circumstances where the representation is of a contractual nature, be it in preparation of a real estate contract or business venture or estate plan, you will be best served by getting payment at the time of delivery. In a real estate matter this may be the closing table, in a business venture it may be at the time of funding the new business entity, and in estate planning it may be when the documents are signed. In long-term matters, some method of payment that tracks the nature of the assignment keeps you from being too far ahead or behind.
But what if you truly have a deadbeat on your hands? In these cases, you simply need to stop chasing after payment and wasting resources. The clearest example is where the client is now tapped out and has no money. The inability to pay—as opposed to an objection against payment—is an early indicator that you need to move on to other, productive matters as soon as possible. As the saying goes, you can’t get blood out of a turnip.
In some cases, the client never really intended to pay. If so, this is a failure of screening and may also be a failure to recognize warning signals over the course of representation. In these cases, you must gauge how much time and effort are required to get the money owed and decide whether it is worthwhile to do so.
You may be uncertain whether or how the client made the determination not to pay. Commonly this occurs when the communication becomes dissonant—you may send letters or e-mails or make calls, but you get no response. Or perhaps you and the client talk but cannot effectively communicate or are at odds, frequently when someone (hopefully the client, not you) lets his or her emotions take over.
If you are considering litigation to collect your fee, remember that malpractice claims, even if not viable, are frequently made as a response to collection action against a client by an attorney. For that reason, malpractice carriers and some consultants recommend you never sue your client for fees.
As a hedge against such claims, I recommend that you document your client’s satisfaction with your work throughout the representation. Work it in routinely as you write letters or e-mail to your client. Repeated communications with some feedback from the client during representation may eliminate or reduce the area of attack for any claim that you committed malpractice.
If you are definitely set on bringing action, provide the file to another attorney to review for any potential malpractice issues before you initiate collection. This is particularly important if you are having difficulty remaining objective. You can also bring in a third-party attorney to pursue the collection; legal fees are recoverable in contract actions, and the presence of this attorney may facilitate continued objectivity.
Some collection agencies market themselves to attorneys. My caution with regard to allowing a nonlawyer to look at your file or billings is that it may make you liable in some jurisdictions for disclosing confidential or privileged information. Even where permissible, I greatly prefer to tend to the matter myself or have an experienced third-party attorney address collection.
I recommend that you proceed carefully any time you consider taking adverse action against your client. Intemperate comments, inappropriate humor, or other actions may be blown out of proportion and used against you even when you do not take adverse action, so imagine what might happen if you do. You may find yourself facing liability issues in addition to nonpayment.
Be absolutely certain that pursuing litigation to collect your fees is worthwhile. Weigh the money you are owed against the time and resources required to pursue the client, and consider the likelihood of collecting any judgment that is received as a result. Are you willing to give the matter the time and attention needed to bring it to a jury trial in two years or more? Would the same time spent on marketing generate more money? And how would taking action against your deadbeat former client affect your standing with current and potential clients? Would the adverse publicity impact your business?
In my practice I generally elect to cut my losses as early as possible and move on. In state courts in Texas, one may typically withdraw in civil matters if it does not prejudice the client (e.g., if there is no pending deadline or imminent trial date). Even if there is a deadline, opposing counsel may grant an extension to remove the prejudice.
Having said that, I do not take the position that a deadbeat client should never be pursued. If you are known for that position, then a client may take advantage of you.
As an attorney in private practice for many years, the last dozen or so as a solo, I have had my share of issues with nonpayment. My goal is to learn from them and move on. Right now I am working to develop earlier recognition of payment problems with longtime, good clients; in these cases, my sensitivities with regard to payment have been dulled by prior dealings. Client circumstances do change over time, and you must constantly evaluate your client base.