lawyer debt
Do lawyers send demand letters to a client who owes them money or do they just sue?
<p>If a lawyer has a deadbeat client, do they just immediately file a complaint against them and seek judgement, or do they send a demand letter first threatening to sue them?</p>
<p>I am not asking about when they are do debt recovery for someone else professionally. I am asking what lawyers do when one of their own clients owes them money and shows no signs of paying voluntarily.</p>
<p>The reason why I ask is that I trying to determine to what extent demand letters are just efforts to generate billable hours, or whether they have a legitimate purpose. If lawyers never bother to send demand letters when they collect their own debts, then obviously the letters are just a revenue-generation method.</p>

<p>Demand letters are often used to collect debts from one's own clients, most prominently, because filing a lawsuit against a client often triggers a counterclaim for malpractice or an ethical grievance, even if it is not justified on the merits. Demanding payment without suing rarely has these consequences and often isn't even enough to trigger an urge to post an unjustified (or justified) bad review of the lawyer online.</p>
<p>Demand letters are not just efforts to generate billable hours. Lawyers want to generate billable hours for clients who pay them reliably, rather than devoting time to work collecting from a client who has a significant likelihood of not paying.</p>
<p>One reason to send demand letters is that sometimes, the reason that clients don't pay is not that they are unwilling to pay, or dispute the bill, but that they are currently unable to pay. A demand letter keeps the debt fresh in the client's mind when an ability to pay is restored. Quite a bit of hourly charge legal work is <em>de facto</em> contingent fee work because the client almost by definition won't have the ability to pay for it promptly if the outcome is a bad one (often for reasons beyond the lawyer's control).</p>
<p>Demand letters are cheap, can often be drafted by administrative staff for attorney review, and because they are cheap, don't have to have a high success rate to be worth the effort. Even a 5%-10% payment rate for unpaid fees that are sought in demand letters makes them worth it.</p>
<p>A second reason to send a demand letter can also trigger a written response acknowledging that the debt is owed and apologizing for not paying, and/or paying a token amount like $25, each of which extends the statute of limitations to collect the entire amount of the debt for unpaid fees.</p>
<p>A third reason to send a demand letter is that it helps the lawyer to keep current on the client's address, if the client moves, while a mail forwarding order is still in place.</p>
<p>A fourth reason to send a demand letter is that it discourages the client from trying to get the lawyer to do additional work on existing or new matters that the client can't afford to pay for (especially in non-litigation representations) because it reminds them that they already owe money to the firm.</p>
<p>Typically, a lawyer sues when (1) the client is known to be collectible now, (2) there is not credible basis for a malpractice lawsuit and there was not a bad outcome, and (3) the statute of limitations is approaching or the client has a serious chance of not being collectible later.</p>
<p><strong>The Business Model Context</strong></p>
<p>In a typical small and medium sized practice with a mix of litigation work done on an hourly basis and transactional work involving negotiations that are not flat fee, maybe 10% of unpaid bills are ever the subject of a collection lawsuit brought by the law firm that wasn't paid.</p>
<p>A firm like that often ultimately writes off as much as 20%-30% or more of all the fees it bills to its clients on an hourly basis (with substantial variation from year to year), and typically receives maybe a third of all the fees that it is ultimately paid more than 90 days after the due date for the invoiced fees. A pattern of a client not paying for several months and then making a big lump sum payment for reasons that may or may not be related to the representation is fairly common. For reasons like this (and the timing of contingency fee payouts) solo practice and small firm lawyers with non-criminal practices typically have incomes that vary wildly from year to year, even though the amount of work actually done each year as measured by billable hours is quite consistent.</p>
<p>Large law firms are actually quite similar to this business model as well, although they charge higher rates and bill more hours on cases, and the law of averages keeps their monthly fee collections a little more consistent. Many large firms pay all of their expenses from a line of credit so that they don't have to worry about the timing of their collections to pay their monthly expenses, and then settle up with their bank at the end of the year.</p>
<p>Certain kinds of firms (e.g. criminal defense) require all anticipated fees to be in a retainer before work is started. Other kinds of work (e.g. probate administration and flat fee transactional work and contingent fee work) usually is paid promptly and reliably when due.</p>
<p>In the insurance defense counsel business model, invoices are almost always paid so demand letters aren't needed, but are usually paid very slowly (90-180 days from invoice), the hourly rates are below average, and the insurance company routinely nitpicks bills to reduce hourly charges in any given month by 5%-10% or so.</p>
