Personal injury law firms on contingency fees face unique accounting challenges: tracking attorney-paid expenses, client costs, and eventual settlements. Fees typically run one-third of recovery, and accountants must set up liability accounts, use advanced cost tracking, and reconcile trust accounts to monitor cash flow health.
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This week we're gonna talk about understanding legal contingency accounting, and it's a different breed. So if you've been working with a family lawyer and you know the ins and outs of doing that work, maybe it's mostly accounts receivable based, or maybe they do use trust accounting, or maybe you work with an estate planning attorney with a lot of legacy accounts that are really long and detailed, and then you've landed this personal injury attorney. And you're looking at the trust account balances and there's not a lot of money there, and you're trying to understand the ins and outs because the most important part of this type of work is tracking the fees. 'Cause the client, typically your client, the lawyer pays all the fees on behalf of the client and then they recoup that when they win the case or matter. So think about a car accident where somebody's injured. There may be medical bills. They might have to go to rehabilitation, and pay for that. There could be many reasons. Maybe there's some lost wages in there. So the client, the attorney-client, goes to battle for this person that was injured against the other insurance company or the other person involved. And the case can build over time, and usually they last about 2 to 5 years depending on the state. And then they come forward in court, and usually they'll go against the insurance company. Most of the times they win most of their matters. They get a big lump sum of money, it gets put into the trust account, and then it gets divided up by paying back all the fees first. So all the fees, the attorneys made whole on all the fees as long as the court has allowed it. So sometimes they have to write down some of those fees, and then they get usually typically a third of the winnings for their legal fees. So they don't track time as much, although some do. It depends on the firm. The bigger the firms, you see more workflows and more patterns, more staff set up to— maybe they'll try to settle the matter out of court, saves money, helps the client, gets the money to the client quicker. Sometimes you'll see loans where the lawyer— the law firm is loaning money to the client before the matter is settled. You have to track those loans separately by client and interest and amount. It can be a lot of work. So don't think that this trust accounting is simple, because the money comes in, you divvy it out. Boom! You're done. End of story. We're all done with the money. That part of it's simple, but the rest of it is not. So tracking those fees are super important, and making sure that each fee that's paid for on behalf of a client is properly tagged. I think this type of law firm needs the software even more, because trying to do it in QuickBooks by using billable expenses can be difficult and cumbersome to track. It's also a practice area where you'll see that they, the attorney will try to skip that part, not pay for the software. And I think the software, I always say with lean law, it's, I have a method called look ma, no hands where you've got a Hubdoc situation or a Dext importing all the expenses in, especially if it's a larger firm, pulling them all in and then you can book them to advanced client cost and really track that. Don't forget you have to reconcile that account because sometimes they don't win the matter and they have— that ends up being a full-on expense for the, for the law firm. Then you have to journal that down and debit the billable expenses unrecovered account and then credit the advanced client costs to clear it. So that's a big part of the work that you do here. So you might not be tangling with trust reconciliation as much as client cost reconciliation in this case. So just understanding how contingency accounting works is really critical to grasping the concepts that are involved. You still need to make that MatterView, um, liability accounts, sub-liability accounts to track the money as it comes in, and then you can properly close the accounts as the files come to fruition. Uh, I would even suggest to make it easier to track the advanced client cost in a similar fashion. So it's an asset, it's an other current asset account, but you can sub-asset it down by the client, especially if you're not using the software to track it. So that way when they do win, you're not missing any of those expenses, because that can be really a problem with these types of law firms. Know that these law firms can have struggles with cash flow, so you can become the attorney's best friend as you start to work with these contingency clients. But I think for the most part this can be easier to track trust, but more complex for doing the client expenses. So know that that's a part of it. And know that you need to be, need to see the original engagement from the attorney so you understand what they're offering their client. That's a big part of it. You probably should do that with every client, but at least make sure you do that with the contingency lawyers. So you wanna understand where exactly their, their mindset is with their clients and what they're agreeing to. So you have that full knowledge, transparency, you know what's happening. Sometimes it's not always 33 1/3% that they collect. Sometimes it's different amounts. There's a lot of write-offs, write-downs. You just have to know how it works with your client. So Clio has a personal injury style of software. It's an add-on you have to pay for. I highly recommend it. It's really good for the lawyer side. It's meh, it's okay for the accounting side, but for the lawyer side it's good. And then we have access, we can see what's going on in there. I think you're going to see that there's gonna be more software coming out that will help you track it. It's just important to be able to follow these, this type of— expenses going out of the firm, money being spent on behalf of the client. That's the most important part. And making sure that you keep impeccable records, as always, just like I've mentioned multiple times, it's important to follow the money and know where the money is going. And who it belongs to. It's critical. So I've got a couple case studies inside of the article if you wanna read the article. And truly, if you have any questions, please reach out. We'd love to have conversations on social media about this stuff. And if you want, you can join our Law Lab group and be part of a mastermind group with a lot of your peers that will help you through any legal accounting issues. So we'll see you next week. Bye now. Bye.
