Collections depend on collection policy

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Published on 11/5/07

Our recent discussion of non-engagement letters raises the point that attorneys and law firms often find it necessary to send such communications because they have failed to establish, explain and enforce effective collection policies.

Lack of a firm-wide written collection policy, or a refusal to use outside collection agencies to collect on overdue accounts, can lead a firm to financial disaster.

While the collection policy need not be part of the engagement letter's fee agreement, the engagement letter should clearly state the consequences to the client for failure to honor the agreed-upon payment commitment.

Your written policy must detail how to keep track of when clients are behind on their payments, and how to contact clients when they are late with payments.

Assume that every client will be a collection problem. That way, you will be well-armed with a variety of signed — and initialed — agreements, which will demonstrate the client's advance knowledge and acceptance of the billed fees and costs. Train your staff to let you know quickly about who is not paying their bills so that you can take immediate and necessary action

Your collections policy should cover in usable, electronic form everything from the beginning of the relationship with the client to the payment of the final bill. Hire a collections manager or designate a staff person to handle all the details of the collections policy, including:

  • credit terms (when to enquire on unpaid balances, when to stop work if payment stops);
  • a sample fee agreement, to be modified as necessary;
  • collection terms, including guidelines on when and how to engage a collection agency;
  • incentives for lawyers to have a high collection percentage on the fees they bill (called realization rate); and
  • enforcement actions against those partners who lag on collections (such as withholding compensation or deducting collection expenses from it).
Don't ask clients for money yourself. If payment hasn't arrived, I advise lawyers not to be the ones to call the clients about it. Instead, ask someone from your staff who's good with people and sensitive to their needs to make the call.

If the lawyer calls, clients may become confused in future calls about whether the purpose of the call is to request information, to seek new business or to request payment. The result will be their avoidance of answering your call.

The best practice is to keep yourself apart from the collections function. As a corollary, make sure your "designated caller" contacts and thanks a client who has paid; this kind of courtesy pays off in increased goodwill that often makes future payments timelier.

If necessary, use a collection service. There are certainly ethical snares involved, but you can avoid them by disclosing to a collection service only those details that are absolutely necessary for them to do their job without jeopardizing client confidentiality. Moreover, it is a given that a collection effort should not be made unless you have reviewed the client file and made sure that it contains no basis for a malpractice allegation against you.

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