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Can I put that on your card?

Times are getting tougher. Businesses are trimming expenses where possible.

In these difficult times, how can a law firm ensure that it will be paid for the legal work that it does?

One suggested method that might be a bit surprising in this tight credit market: focus more on accepting electronic payments, such as credit and debit cards.

The traditional method of assuring full payment of fees is to get an adequate retainer in advance. Having the money in an attorney trust account is a very secure situation for the firm.

In a perfect world (for law firms) all attorney fee statements would be merely for the client’s information, with payment drawn from the retainer. But in the real world, a significant amount of the firm’s monthly statements goes to clients for payment, either because the retainer has been exhausted or the arrangement is that the client will pay fees on a monthly basis.

Many lawyers would never think of running a credit report on prospective clients before they agree to accept a matter. But even a single month’s billing on a highly active matter can be substantial, and often a client will go more than a month without payment before the firm takes any action. In effect, the firm is extending credit and will suffer a real loss if the fees go unpaid.

Given this reality, it is surprising that many firms still do not accept payment by credit card.

Admittedly, there are a few firms that might see little benefit, such as a firm that represented few clients who are all financially stable and always pay their bills on time.

However, for most law firms, including virtually all of those that do business with consumer clients, there seems to be no good reason not to accept credit cards. It is a positive development from a client service perspective and also good for firm cash flow. The transaction fees pale in comparison to the value of receipt of immediate payment.

The reality today is that many individuals do not carry a checkbook, preferring to rely on credit or debit cards. This is expected in today’s business environment. And a lawyer would never want to be in a situation where a client was attempting to make a payment and the firm was unable to accept that payment.

But the benefit of a firm accepting credit cards is not just convenience for the client. Accepting credit cards may allow a firm to receive funds that it otherwise would not receive and perhaps even be hired for work that it might otherwise miss.

Legal matters are generally expensive and often a consumer client may not have the funds in his or her bank account to immediately pay an appropriate retainer, even though the need for legal services might be immediate. Because of cash flow constraints, lawyers often get asked to accept delayed payments over a period of time. The very best answer to an inquiry about whether a client can “pay this out” is “sure, we accept credit cards.”

Accepting retainer fees for new matters by credit card is also a great positive for the firm. In effect, by accepting a credit card, the firm has outsourced the risk of nonpayment to the credit card company.

No ethical prohibition

The American Bar Association has long accepted the propriety of attorneys accepting credit card payment for their fees. (ABA Formal Opinion 338, Nov. 16, 1974) The opinion was later withdrawn for other reasons.

In most jurisdictions, an attorney may accept a retainer paid by credit card as long as the entire fee is deposited directly into a trust account with any applicable service charges being borne by the attorney.

To be safe, lawyers should consult with the ethical authorities within their own jurisdictions to clarify how these retainers should be handled. In some cases, you may find that your state bar association has endorsed a credit card service provider, as the Oklahoma Bar Association has done.

While many lawyers are concerned about chargebacks, the only two issues are whether the charge was authorized and whether the services were provided. The client’s signature authorizing the charge almost always meets the first criteria and the firm’s billing records satisfy the latter one.

A clear set of procedures can make sure that these matters are handled correctly. Law firms should make clear on the billing statement that clients can pay by credit card either by filling in information on the bill, signing and returning the statement or by calling to make their payment.

Pre-authorize fee payment

In addition to accepting credit cards, firms can also set up procedures allowing clients to execute pre-authorization agreements.

As part of a pre-authorization agreement, a client can agree that:

  • a card will be charged for the balance for fees and costs due each month on a fixed date, usually several days after the bill is mailed so the client has time to review it.
  • if payment is not paid by a certain past due date, the card can be charged for the balance.
  • a recurring fixed charge will be incurred monthly until the bill is paid. Often this is done when a client has fallen behind on paying fees, but it could be used for an availability retainer or other regular monthly payment.
  • payment of the balance due will be delayed until a time certain when the funds will be available.

Preauthorization agreements will generally be used more often with a bank account debit card, but will work with a credit card as well. If the client is using a credit card with an available credit limit, the law firm will generally want to charge the entire retainer.

Starting to accept credit cards or accepting them more frequently might not be your first impulse in a tight credit market. But hopefully this approach will increase your law firm’s bottom line.

Jim Calloway is the Director of the Oklahoma Bar Association Management Assistance Program. He publishes the weblog, Jim Calloway’s Law Practice Tips at http://jimcalloway.typepad.com. He serves on the ABA Law Practice Management Section Council and is also chair of its Practice Management Advisor’s committee.  He is a frequent speaker on law office management and technology issues.