Is It Ethical To Collect Past Due Receivables?

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Brent Anderson
Sep 10, 2011

Thoughts on Law Firm Receivables

Is it ethical to collect past due receivables? Is it good business?

In my humble opinion the answer to both of the above questions is a resounding “Yes”! Every person involved in the management of a law firm has been presented with ideas about improving the environment and culture of their respective firms. Improving the firm and making it a desirable place for both attorneys and clients often times involves improving the bottom line. How is this done? This first and most obvious is to increase billable hours. Another way is to raise rates. Yet another is to “audit” unprofitable work. The list could go on…
Until recently, it seemed that no one in the industry wanted to look at the very real issue of collecting past due receivables. Why? I’d like to tell you why and give you a few examples of the popular perception that debt collection – especially third-part debt collection – is somehow unprofessional or unethical.

1). “It’s unprofessional” – I personally don’t believe that. Once the firm has performed competent and ethical services for their client, they have every right to expect to be paid. In fact, if the firm projects the image that they are not willing to pursue the debt, the inference could be drawn that they don’t really believe their work is worthy of payment at all. A good comparison would be if my accountant didn’t expect to be paid. I would begin to suspect that my tax returns, etc. were potentially a bit sloppy or possibly something that could get me is some severe trouble!
When a law firm expects to be paid and asserts itself as a rightful creditor it sends the message that the work performed is of very high quality and cannot be dismissed as something of “no real value”.

2). “What about malpractice claims?” – First of all, let’s consider the fact that there can be no real counterclaim filed without a lawsuit being filed first over fees. In my opinion it’s the malpractice insurance carrier who has perpetuated this long standing “fear”. Bottom line: If you practice law outside the boundaries of accepted ethics, you might experience a malpractice suit. If you make an assertive attempt to collect a debt owed by a client who has received quality work, you are only solidifying the quality of your work in the first place.

3) ” It’s unethical” – Actually, many bar associations and other “governing” bodies concerning ethics would disagree. As far back as 1961 there have been numerous opinions issued around the country that support the use of third-party debt collections. If the collection services are discreet and professional and guard the attorney-client privilege and confidentiality then there is nothing to fear. Sending your receivables to a third-party is not a violation of the attorney-client privilege. The limited waiver of confidentiality is necessary to perform any collection activity. If you have to sue your client, the information becomes a matter of public record! It seems to me that sending your claims to a competent collection service is much less risky since they are governed very heavily concerning confidentiality. If they themselves are of high quality – like your firm – then you can be sure they do not want to risk exposure for themselves or your firm.

4). “We collect it all in-house” – No. You don’t. My bold statement is not meant to offend, rather it’s meant to inform. It is widely accepted in nearly every other industry that collection agencies are necessary to help collect the receivables that cannot be collected in-house. In fact, all of these other industries rely on the theory of the “vanishing dollar” to decide when accounts should be sent to collection. Example: You begin to lose money exponentially whenever payment is not received within the net terms. As the account gets older, the collectability decreases and your losses from an inability to use that money substantially increase.

For example: If you operate at a 4% profit margin, every $1000.00 that is not collected requires $25,000.00 in new services that actually result in full payment just to break even from that $1000.00 loss.

Here’s the bright side: There has been a bit of a renaissance in the legal industry as of late to pursue past-due receivables more assertively. This means it is much more widely accepted by hundreds of firms across the country. Take a look at how long it takes a billable hour in your office to be converted to cash. Maybe it’s time to put that money to work for the firm a bit earlier.

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Brent Anderson, P.C.S., is our Director of Sales and Marketing and has over 20 years consulting organizations on how to deal with their aging receivables. Contact Brent at banderson@summitcollects.com or (763)-712-3778.