Peter Olson’s Solo in Chicago is another one of those great, unsung blogs that’s been running for years, seamlessly marrying tips on starting a practice with Olson’s own experiences. A few days ago, Olson posted a link to an article by legal consutant Ellen Freedman from the ISBA journal (not publicly available) entitled Don’t be Afraid to Get Paid. The post goes through the expected practices such as billing early and consistently, discussing the importance of payments with clients and coordinating with the client’s billing cycle. Though most of us have seen this kind of advice, we often fail to implement it.
Freedman’s last tip however, is one that’s new to me:
Despite your best efforts, some clients may never pay their bills. So, “When all else fails – REVENGE IS SWEET!” reads one of Freedman’s presentation slides. Explaining, she suggests, “Wait until the statute of limitations for malpractice claims has passed, and then wait until November 15th.”
Then, she continues, you can send your debtor client a letter saying it’s clear that, despite your pleas to discuss the matter, that the client has no intention of paying your bill and, therefore, has left you with no alternative but to forgive the debt. “We will be sending you a 1099 for the value of the services and the costs that we are removing from our books.” On receiving such a letter, she says, many people will be so scared that they will actually send the lawyer a check.
I’m sure others will disagree but I don’t like this tip. At all. I have no problem with a lawyer suing to recover fees from a client who hasn’t paid. But if you’re going to do it, do it the right way: ask for payment nicely, then ask agai. If the amount remains unpaid and if the balance is too large to write off, retain a firm that specializes in attorneys fees collections and let them have a crack at recovering the fee and filing suit if all else fails (don’t ever file the action yourself). What you shouldn’t do is sit around stewing until the malpractice statute of limitations runs — which may be as long as two or even three years — and then turn around with this kind of a gotcha. (As an aside, it’s not clear from the advice whether Freedman endorses actually sending the 1099 or just threatening to do it, but as far as I’m concerned, it’s one and the same, and indeed, threatening to take action that you will not carry out may violate other ethics rules). What’s the next step — calling the IRS to tell them off to audit your client to make sure he or she paid taxes on the forgiven debt?
The other issue is secondary. In many (by no means all), but many nonpayment cases, lawyers rather than clients are to blame. How so? Because sometimes lawyers run up a bill that they’d have realized the client could never pay if they’d have listened to the client at the outset. I recently encountered this kind of situation where an individual retained a large firm for a relative minor matter. The firm had been recommended by a friend who was a longstanding client of the firm. At the first meeting, the friend came along and told the firm that his colleague could only afford a certain amount. The firm agreed and offered an estimate commensurate with the individuals needs. But when the case started, the bills escalated out of control because of the strategy that the firm had taken which included substantial double teaming. The individual complained of the bills as did his friend, the longstanding firm client, but despite the pleas, but the firm insisted on pursuing the course it had in mind – and by that time, the client did not feel that he could pull out. At the end of the case, the client ran out of money, owes a substantial amount of money to the firm, which the firm has thus far, not pursued. However, if the firm pulled this kind of 1099 stunt in this case and I was in that client’s shoes, I’d be utterly furious.
Don’t misunderstand me – I am not claiming that lawyers don’t deserve to be paid. Moreover, I would argue that if we want to be paid, we must implement measures to ensure that result, such as moving towards flat fees (which give clients certainty so they can budget for the bill) and transparency in billing (setting budgets, keeping clients apprised of costs and modifying as necessary moving forward). But getting paid and getting revenge are two entirely different matters. I’m a lawyer, not a mobster.
UPDATE – After receiving the below comment, I investigated this technique further and saw this post at Ellen Freedman’s blog entitled revenge is less sweet (11/13/08). Apparently, the IRS only permits financial institutions and not law firms to write off debt – yet nevertheless, Freedman has this to say:
Now of course, the average client, even the highly educated client, probably has no clue that the 1099-C is designated for use only by financial institutions. They also have no clue that the 1099-MISC is an inappropriate form to use. So theoretically, the method can still intimidate many clients into paying. The real question, Donna raised, is whether or not a law firm can knowingly file an inappropriate tax form, and what the IRS might do about it.
[To be fair, Freedman notes that because of the problems with the IRS, she can no longer recommend the "sweet revenge" strategy]. This comment encapsulates clearly what I regarded as improper: use of the 1099 to intimidate clients. I have no problem with lawyers writing down debt (if it’s permissible) as a legitimate business tool, just as suing a client for non-collection is entirely appropriate. But to use a 1099 to coerce a client to pay isn’t at all appropriate in my view.