What Every Lawyer Should Know about Disbursing Funds

CosmoLex Team

Funds-Disbursement
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You’ve just won a settlement for a client. Bravo! The funds from the settlement have been deposited into the client’s trust account, and the client is eager to receive their money. As soon as the funds show up as “available” in the bank feed, you cut your happy client a check—hold up. Not so fast.

Just because the deposited funds are showing as “available” doesn’t mean they’ve actually been cleared, and your local jurisdiction may have rules against transferring money to a client before a certain amount of time has passed.

Here’s what every lawyer should know about disbursing client funds.

What to deposit into the trust account

First, part of what makes a trust account special—and confusing—is that it’s the client’s money, even though the law firm effectively controls the account. Any client funds go straight into the trust account.

The law firm’s money shouldn’t be deposited into the trust account unless it’s being used to cover bank fees or it’s a deposit where some of the money belongs to the client, and some belongs to you, such as a settlement receipt.[1]

Following these and other trust account requirements are an essential aspect of ethical compliance.

A note on credit cards

Law firms can accept credit card payments from clients for deposit into client trust accounts. However, because credit card payments come with a charge fee, it’s important to use a legal-specific merchant.

A legal-specific merchant will deposit the payment into the client trust account but withdraw the charge fee from the separately linked law firm operating account so that you aren’t at risk of an ethics violation.

When to disburse funds

It can be tempting to think that you’re all set to disburse client funds when a settlement payment shows up in the available funds of your client trust account. Most people understand this to mean that the funds have “cleared.”

Unfortunately, that isn’t necessarily true. The term “cleared” gets thrown around a lot. It’s often used to mean available funds—even your bank teller may use it this way.[2] But available funds aren’t the same as collected funds.

Cleared: collected versus available funds

In order for funds to truly be considered cleared, they must be moved from the check writer’s bank to the check recipient’s bank.

In an era when many people do their banking from an app on their smartphone, it’s common to assume money transfers are nearly instantaneous. Yet, that’s not the case. From one local bank to another, money may take three days to clear. Within your same state, the timeline is closer to five days. And for out-of-state banks, you could easily be looking at ten days.

You should absolutely disburse settlement funds to your client as soon as the check has cleared, but no matter what your phone app or bank teller says after a glance at their computer screen, “cleared” in this case needs to mean collected funds, not available funds.

Check in with your state bar or governing body

Check your local and state/provincial rules for disbursement timelines. For example, some jurisdictions ask lawyers to follow the 3-, 5-, and 10-day rule based on whether the bank is local, in-state, or out-of-state.

Others want you to call and verify with the bank that the check has cleared and funds have been collected. If you live in one of these areas and call the bank, they may simply tell you that you’ll have to wait three to four weeks and see if a Non-Sufficient Funds (NSF) notice arrives.

Whatever your local requirements, know that they’re there to protect you. If a client is pressuring you to disburse funds sooner than your law society or state bar or permits, you can tell them you aren’t legally allowed to do so.

The problem with disbursing funds too early

Most of the time, funds labeled as “available” in your bank feed do clear—and there aren’t any problems. This is part of why we have a common perception that cleared funds mean available funds.

However, when funds don’t truly clear, problems arise. For example, suppose a lawyer has disbursed settlement funds to a client, only to learn that the deposit has bounced later. In that case, the lawyer is now on the hook for putting money back into the trust account—which can be a problem if the client refuses to give back what’s already been disbursed.

Especially if you have gone ahead and given a client money faster than the timeline set out by your governing body, then you will have little recourse for getting the money back.

Fraud happens

Although rare, fraud happens. And some fraudsters specifically target lawyers by posing as clients seeking to collect debt.[3] Once the lawyer has received money for the debt collection, the client may pressure the lawyer to disburse the funds quickly—only for the lawyer to later discover that the funds haven’t truly cleared.

When in doubt, be cautious and wait until the funds have been collected before disbursing money to clients.

Keep records

Operating a client trust account comes with record-keeping requirements.[4] Whenever you issue or receive a check, it’s important to record the date, amount, payor, payee, and purpose.

You also need written evidence supporting why a check is being cut from a client trust account—and you need it every time, whether you’re disbursing from a settlement or paying yourself for work completed and billed for.

Keeping up with records and subsequent reconciliation and three-way reconciliation is a lot of work—but it’s work you’re required to do. That said, your practice management system can do some of it for you, including the tedious process of running three-way reconciliation as required by your law society or state bar.

Make the most of your practice management system

There are a lot of rules and regulations around client trust accounts. If you can, we recommend using your practice management system to streamline the record-keeping and reconciliation process.

Some practice management systems also come with safeguards that help prevent you from accidentally commingling client funds and other common trust errors.

But whether you use these features or not, it’s essential to wait until your bank has collected funds deposited into a trust account before disbursing them. This holds true no matter how much your client may want you to hurry up and send them their money.

When in doubt, always follow your local and state/provincial rules.


References

1. ABA Model Rule 1.15: Safekeeping Property
2. Cleared Checks: Risks, Scams, and Confusion
3. Managing Client Trust Accounts
4. ABA Model Rules on Client Trust Account Records – Preface

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