When Is It Worth Negotiating a Partial Payment?
Knowing whether to accept a partial payment—and if so, how much of a discount to give—requires a subtle balancing of several factors.
If you have handled the communication with your non-paying client correctly, by now you should have a fairly clear notion of why you aren’t being paid. One of the best reasons for speaking authentically about these touchy issues with your client is so you can gauge what is really going on, and thus can make the best decisions. Of course, you have to be attuned to whether you are being given truthful information, and in some instances you may want to ask for some documentation of what they are asserting.
At some point in this process you will need to decide when to pursue a claim for non-payment versus dropping it altogether, but before you get to that juncture you should always be considering whether or not to accept a partial payment. The fundamental reason why a partial payment should always be considered is that it may be the most you can salvage out of a nasty situation. If your client is indeed destitute or facing bankruptcy, and there are no obvious other sources of payment, accepting 50 cents on the dollar can be the wisest choice. Knowing whether to accept a partial payment—and if so, what degree of discount to agree to—requires a subtle balancing of several factors, summarized as follows:
- How does the amount of unpaid bills relate to the totality of what the client has paid you already? If they’ve already paid you $100,000 and owe you another $5,000, making a discount deal with them is a far lesser punishment to your overall revenue stream than if they’ve only paid you $10,000 in total so far.
- Who is really liable for the bill, and is there some uncertainty as to which entity or person is on the hook? Sometimes even the smartest lawyers get caught up in a confusion about what is the liable entity, and thus a bankruptcy of a corporation or the liquidation of a partnership can render the liable party insolvent, even when one or more of the principals is still quite rich. Make sure to check to see who signed your fee agreement, and in what capacity they agreed to pay your bill.
- What is the liable client’s real financial situation? This is tricky, as you probably won’t want to bother hiring a private investigator to uncover the hidden assets, but hopefully you have learned a fair amount about your client in the course of your representation. If your client is claiming insolvency while they are on vacation in a five-star resort, you should not necessarily accept their claim of financial distress.
- If you are considering some form of deferred payment over time, you should have a clear written agreement that states that if they don’t make the scheduled payments for the reduced amount, then the entire amount becomes immediately due and payable. Remember, a deferred payment schedule is not necessarily an acceptance of partial payment as full satisfaction of the obligation.
- What’s the likelihood that this client will come back to you for more work (hopefully when they are in better financial shape!), or make valuable referrals to you? Will they truly appreciate what you have done to accommodate their situation, or will they simply move on to exploit the next sucker?
- What is your exposure to a potential malpractice claim or a defense of sub-standard or excessive work? If this is a serious concern, when should you decide to forgo an aggressive pursuit of the unpaid fees? Remember, your list of concerns should not just be the downside of losing such a claim, as the cost in money, time, and possible increased malpractice insurance premiums can make it an expensive encounter, even if you eventually settle or prevail.
- How busy is your practice these days, and how close are you to meeting your overall revenue goals for the year? While these factors aren’t connected to this particular client and his or her outstanding bill, it certainly should impact your decision-making. Pursuing a client for non-payment takes time, is uncomfortable, and certainly isn’t generating newly billable time or income. If your workdays are already filled with paying clients, maybe it is wiser to focus your attention on meeting their needs, rather than chasing after the uncertain prospect of getting paid by a disgruntled former client.
Once you have figured out your plan, make sure you document it properly. You don’t want to write down the bill in the hope that the reduced amount gets paid. Rather, you want to make it clear to your client that so long as they pay the reduced amount by the agreed upon deadline, then, and only then, will you forgive the rest of the bill.
Frederick Hertz, an attorney and mediator based in Oakland, has managed his practice for more than 25 years.
"The Art of Getting Paid" is a one-year series of blog posts that provides a comprehensive training to lawyers on how to get paid.
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