ISBA Report on the Impact of Debt on the Legal Profession: Accurate Assessment or Unfair Assumptions About Solos?

Via Scott Greenfield, I learned about this recent study by the Illinois State Bar Association on
The Impact of Law School Debt on the Legal Profession. Whether or not one blames the debt crisis on law schools (for inflating employment results), the government (for essentially prohibiting discharge of student loans in bankruptcy except in very narrow circumstances), private lenders (for making cash so readily available) or law students (for failing to engage in adequate due diligence before signing up for $200k worth of loans)  there’s no question that the crushing debt burden threatens the foundations of the justice system.

For example, the ISBA report notes that with heavy debt burdens, many top grads can’t afford to accept public interest positions – and even if they’re willing to take a public interest job for a few years, they’ve got to earn enough not just to pay down their own debt, but to save enough to cover their children’s eventual tuition costs.  Of course, the impact of debt on public interest jobs is nothing new though; even back in my day (Class of 1988), many students with loans made the same choices.

The more significant problem is debt’s impact on the ability of lawyers to start or more importantly run sustainable solo or small firm practices. As the ISBA report points out, more new grads as well as experienced attorneys are, by choice or default, opting for solo practice because of the non-existent legal job market. From the Report:

The number of new graduates entering solo practice has increased from 2.8% to 6% between 2007 and 2011. Many more enter solo practice after several years of unemployment or underemployment. Because of their debt loads, however, these attorneys are unable to adequately finance a new law practice. As a result, most struggle, and many consider leaving the law if they are unable to move on to other jobs. This group is also more likely to commit ethics violations and to be the target of malpractice suits….The Special Committee heard much anecdotal evidence suggesting that attorneys with heavy debt loads may be more likely to commit ethics violations. The greatest pressures are on solo practitioners, who may take work beyond their level of competency, face financial pressures to prolong litigation, or terminate a representation inappropriately if a client has difficulty paying. Evidence from the Attorney Registration and Disciplinary Commission does not yet show an increase in ethics violations among lawyers with heavy debt loads. Nonetheless, this data may be a lagging indicator of a problem that is already developing.

Does the ISBA report raise valid concerns about the stability of solo practice? Absolutely. Nor are these concerns new.  Commentators have described the adverse impact of financial pressures on solos’ abilities to competently and ethically serve clients since the 1950s and 1960s – and I’ve expressed my own worries  about the sustainability of new business models like fully virtual law practices delivering unbundled services.  Yes, legal services should be more affordable, but there’s only so little that solo and small firm lawyers can charge before they go out of business, or compromise service to clients. And since most solos and small firms serve middle income individuals, a decline in the quality of service undermines the integrity of our justice system.

Having said that, I take issue with the ISBA’s perception of solo practice. While I’ll concede that financial difficulties may cause solo and small firm lawyers to cut corners, I don’t believe that there’s a higher rate of unethical conduct by solos and smalls in economic downturn than across the board in the profession.  There are plenty of instances of big firm lawyers overbilling or skimming money from client accounts (and my guess is that many of these incidents never making it into ethics reporters because the firms quietly settle the accounts and don’t report the misconduct). There’s no need for the ISBA report to taint solos, particularly when any “evidence” of misconduct is admittedly anecdotal.

Further, to the extent that the ISBA estimates the start-up costs of a new firm as $20,000 and monthly expenses as $2846, those costs are somewhat exaggerated. Though lawyers shouldn’t jump into solo practice on a whim, neither should they be presented with information that’s so discouraging that they run away from what might be a viable option.  Even to an established practitioner like me, $20,000 in start up costs sounds scary-high — but if you drill down into the assumptions, you find that they’re either inflated or unnecessary. For example:

The costs assume $800 for a computer, printer and copier and $250 for a phone. These days, most law grads already have this equipment (perhaps not a copier, but a smartphone can sub as a copier and scanner in a pinch) and it’s generally powerful enough for basic law practice needs. The $20,000 start up costs also include $9000 (reflecting $1500/month for salary in hand up front). Again, while it’s true that in starting a firm, you need to live on something, many grads do eliminate these costs by living with family or having support from a spouse in the early days of practice – and the report should note that this is also an option.  Thus, $10k can be eliminated from the ISBA’s $20,000 start up estimate right up front (In addition, $8500 of that amount is earmarked for 3 months of operating expenses which needs to be spent but necessarily aggregated up front).

The estimated operating expenses of $2846/month can also be whittled down.  The amount includes $600/month for office rent (which can be cut to zero by working entirely from home or to $200-$300 with virtual or coworking space). The $500/month LEXIS/Westlaw fee can be slashed to nothing with Fastcase (the ISBA includes it free in membership) or Google Scholar or even with LEXIS’s limited libraries (e.g., Illinois only, Energy only) which are under $200/month. $300/month for malpractice insurance seems high for a new lawyer (I pay less for $2 million in coverage) though I suppose it depends on practice area.  Finally, the $300/month advertising expense can be cut back to $100 without any ill effects. Again, applying these reductions, (e.g., less $400/office, $500/research, $200/malpractice insurance and $200 for ads, monthly costs decline to a more manageable $1546. And for those fortunate enough to have health coverage through parents or a spouse, monthly operating costs come down to $846.

Inflating the costs of starting a law firm has a chilling effect on new grads who can’t otherwise find a decent job (even a low paid one with good training) and want to start a practice as a way to stay in the profession. When even the solo option is put off limits, many new lawyers will spend years spinning their wheels, meandering hopelessly through a thicket of dead end contract jobs or non-legal professions still unable to pay loans while wasting precious time on their loan deferral period.  By the time some lawyers decide to start a firm after a year or two of post- law school unemployment, they’re even worse off: the clock on student loan deferrals has nearly run and if they’ve worked in dead end positions, they are no further along in gaining valuable legal skills.  Better to start a firm at a time when parents’ insurance policies may still provide coverage and when you can benefit from reduced bar dues and other minor advantages accorded to new graduates.  By the time a two year deferral ends, a new grad’s practice may be stable enough to start making a dent in loans – or the newbie’s work may have lead to other employment opportunities.

The ISBA’s solutions to the impact of debt on solos- with the exception of facilitating the transfer of rural practices from retiring lawyers to newbies (a concept that can be extended to pairing more senior solos in any area with newcomers) leave much to be desired. Making repayment of debt for solos in private practice contingent on pro bono is like robbing Peter to pay Paul. Much of the work that solos handle is pro bono in nature; solos routinely cut or cap fees to provide service to those who can’t afford it. But forcing solos to take on more free work to qualify for debt repayment is not just ill-conceived but also unfair. After all, many lawyers in government and public interest sector jobs receive loan forgiveness even though they may take home double a solo’s salary (compare a $55,000 starting salary at DOJ to the $25,000 or less income that a first year solo may take home) plus benefits. Likewise, suggesting that law schools set up incubators to perform low bono work on a steady stream of impoverished clients doesn’t do much to teach solos about the importance of building a sustainable practice with desirable clients through blogging, networking and other activities. 

There are better ways to encourage and support lawyers willing to work hard for a chance to get a law firm off the ground. How so?  First, the ISBA as well as other state bars can slash their expenses by collaborating on ethics guidance. Is it really necessary for every jurisdiction to issue an ethics decision on cloud computing or metadata that say basically the same thing? Second, the ISBA can’t put the burden on solos and smalls to help new solos with mentorship and apprenticeships. Even supervising a lawyer working for free can be extremely time consuming and can cancel out any of the benefits of free labor. The ISBA should come up with ways to take the risk out of mentorship (such as lawyers being penalized for having “free” interns or failing to pay employment tax for interns whom the firms intended to treat as independent contractors). Perhaps the ISBA can take on the interns itself and then consign them to firms that volunteer – but the firm would contract with ISBA, not the lawyer directly. In addition, participation in the mentor program should afford lawyers not just free CLE but also credit on other ISBA events.

Third, just as ISBA raises money from big firms for pro bono, it should ask firms to kick in money to a fund to help solos and smalls and other underemployed to repay loans – or to assist solo firms that seek to hire or train a newbie.

Other suggestions – ISBA should use its bargaining power to extract better discounts from  vendors and advertisers. If LEXIS and Westlaw do in fact cost $500/month, why hasn’t the ISBA demanded steep discounts or prohibited these groups from advertising to ISBA members? Likewise, both the ISBA and other bar associations should look for opportunities to aggregate solos and smalls into health coverage plans provided by other freelancer associations to procure greater reductions.  Fourth, the ISBA and other bars should advocate for loan forgiveness for solos serving not just low income but also middle income clients.  Finally, the ISBA and other bar associations should stop accepting advertising from dubious lead generators and other schemes that hurt solos far more than they help.

The ISBA isn’t wrong to express concern about the impact of debt on the quality of service provided by solos and smalls. But the debt crisis is a problem for the entire bar, not just a discrete group. Singling out solos as ne’er do wells doesn’t help instill confidence in lawyers and in fact, only reinforces the contentions of hackademics that solos are inept and that the public is better off with non-lawyer provider. Moreover, deterring lawyers committed to a career in the law away from solo practice when it may be their best and only option for a legal career makes no sense. Instead, the ISBA and other bars (as well as the entire legal profession) should take more steps to ensure the future of solo and small firm practice in the profession. Because if solos don’t survive, then neither will our justice system as we know it.