How To Deal With Bad Debt In Your Law Practice

Trust Accounting

Wouldn’t it be nice if all of your clients paid on time? Unfortunately they don’t. A few are dishonest, more are forgetful and others simply don’t have the resources. According to legal consultant Art Italo, “bad debt can run as high as 30% of total billings for small firms and solo practitioners, and up to 15% for large firms”. Can you really afford to lose 15% to 30% of your income? Employ a few basic business tactics plus CosmoLex legal billing software to minimize bad debt.

Initial Consultation

Debt collection starts the first time you meet a client. In addition to discussing the matter at hand, inform the client about your fee structure, billing practices and late payment penalties. Some attorneys are afraid to talk about money so boldly because they think it makes them look mercenary. Well, you are mercenary! We all are. We do our jobs for money. Any client chased off by frank discussion of payment is a client who isn’t going to pay anyhow.

Get A Retainer

The best way to be paid is up front. Few successful lawyers work without getting either a flat fee or a security retainer before starting a case. In addition to securing a retainer you need to track funds so you don’t inadvertently spend money before you earn it, and you need to send out low retainer reminders so clients will replenish funds as needed. CosmoLex’s attorney trust accounting software features are a big help here.

Regular Billing & Timely Reminders

If you don’t bill promptly then how can you expect clients to pay promptly? Issue clean, professional invoices to clients every month, even if you are taking your payment from a retainer. If an account gets overdue then send a late payment warning immediately, and continue to follow up until the account is settled. CosmoLex’s built-in invoicing and payment reminders make it easy to send batch emails with the click of a mouse.

Late Fees

There is some debate about whether a late fee is a good idea or not. Penalties prompt clients to pay quickly, but may offend clients and cost you future business. A good rule of thumb is to charge late fees, and the penalties should be spelled out in the initial consultation, but be willing to waive those fees in cases of client hardship. It’s better to give yourself the option to be a good guy rather than the bad guy.

Collections And Forgiveness

Eventually you will get a debt that the client simply won’t pay, either through lack of intent or lack of resources. At this point you have two choices. You can turn the debt over to a collection agency that will buy the debt for pennies on the dollar, but then you kiss that client’s future business good-bye — which might not be a bad thing if it’s a client who doesn’t pay. Or you can accept the bad debt as a tax write off. The better choice will depend on a lot of factors, not the least of which being your relationship to the client.

A pro-active approach to debt collection will reduce your bad debt to a fraction of what it could be. CosmoLex time and billing software can be a crucial part of your billing and collection activities by allowing you to accomplish your billing activities easier and faster than you could using other methods. Try CosmoLex free and see how much it streamlines your practice’s billing process.


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