Debt Collection Law Practice
§ 1.1Client and Claim Information
When a new matter is received, the attorney should open a case file, assign a file number, and complete as much of the client information sheet as possible. The client information sheet, form 1-1 in this chapter, should be the top item in the case file or otherwise placed where it can be referred to easily. Client information may also be kept in a computer database or file management system, which may be particularly helpful if the client refers multiple matters to the attorney.
Form 1-1 has blanks for the most important or recurring information about the case. As the case progresses, more information, such as the date of judgment, may be entered.
§ 1.2:1Informing Client of Grievance Process
Attorneys practicing law in Texas must provide notice to clients of the existence of the grievance process by one of four means: making available at the attorney’s place of business brochures printed by the State Bar of Texas describing the grievance process; posting a sign prominently in the attorney’s place of business describing the grievance process; including the grievance process information in the written contract for services with the client; or providing the information with the bill for services. Tex. Gov’t Code § 81.079(b). This information can be included in the contingent fee agreement at form 1-2 in this chapter.
The Supreme Court of Texas and the Texas Court of Criminal Appeals adopted “The Texas Lawyer’s Creed—A Mandate for Professionalism” in 1989. The Texas Lawyer’s Creed, along with additional information regarding its adoption, is available at www.legalethicstexas.com. For a provision of the Creed to be enforceable by the courts, the courts must act pursuant to their inherent powers or existing rules, because the Texas Lawyer’s Creed is not binding law but a recommended code of conduct. The Creed does not create new duties and obligations enforceable by the courts beyond those existing as a result of (1) the courts’ inherent powers and (2) the rules already in existence. PNS Stores v. Rivera, 379 S.W.3d 267, 276–77 (Tex. 2012).
The Texas Lawyer’s Oath requires an attorney practicing law in Texas to—
1.support the U.S. and Texas constitutions;
2.“honestly demean oneself in the practice of law”;
3.discharge the attorney’s duty to the attorney’s client; and
4.“conduct oneself with integrity and civility in dealing and communicating with the court and all parties.”
The oath must be endorsed on the attorney’s license, subscribed by the attorney, and attested by the officer administering the oath. Tex. Gov’t Code § 82.037(b). Tex. Gov’t Code §§ 602.002–.005 set out a list of persons who may administer the oath. A copy of the oath is available at www.texasbar.com.
§ 1.2:4Duty to Report Ethical Violation; Peer Assistance Program Alternative
The Texas Lawyer’s Creed states that a lawyer “must abide by the Texas Disciplinary Rules of Professional Conduct,” and “professionalism requires more than merely avoiding the violation of laws and rules.” The Texas Lawyer’s Creed—A Mandate for Professionalism, reprinted in Texas Rules of Court—State 763 (West 2019).
Rule 8.03 of the Texas Disciplinary Rules of Professional Conduct requires attorneys to make a report when a substantial question arises about another lawyer’s “honesty, trustworthiness or fitness”:
8.03 Reporting Professional Misconduct
(a)Except as permitted in paragraphs (c) or (d), a lawyer having knowledge that another lawyer has committed a violation of applicable rules of professional conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate disciplinary authority.
(b)Except as permitted in paragraphs (c) or (d), a lawyer having knowledge that a judge has committed a violation of applicable rules of judicial conduct that raises a substantial question as to the judges fitness for office shall inform the appropriate authority.
(c)A lawyer having knowledge or suspecting that another lawyer or judge whose conduct the lawyer is required to report pursuant to paragraphs (a) or (b) of this Rule is impaired by chemical dependency on alcohol or drugs or by mental illness may report that person to an approved peer assistance program rather than to an appropriate disciplinary authority. If a lawyer elects that option, the lawyer’s report to the approved peer assistance program shall disclose any disciplinary violations that the reporting lawyer would otherwise have to disclose to the authorities referred to in paragraphs (a) and (b).
(d)This rule does not require disclosure of knowledge or information otherwise protected as confidential information:
(1)by Rule 1.05 or
(2)by any statutory or regulatory provisions applicable to the counseling activities of the approved peer assistance program.
Tex. Disciplinary Rules Prof’l Conduct R. 8.03, reprinted in Tex. Gov’t Code Ann., tit. 2, subtit. G, app. A (Tex. State Bar R. art. X, § 9) (emphasis added). The rule and the alternative method of reporting under rule 8.03(c) reflect the values of the Texas Lawyer’s Creed; rule 8.03(c) allows attorneys to help each other without involving the disciplinary process.
§ 1.2:5Texas Lawyer’s Assistance Program
The only approved peer assistance program to which lawyers may make reports under rule 8.03(c) is the Texas Lawyer’s Assistance Program (TLAP). See Tex. Health & Safety Code § 467.001(1)(A); Board of Directors Meeting Minutes, Jan. 20–21, 1989, State Bar of Texas. TLAP is available to lawyers, judges, and law students twenty-four hours a day, seven days a week, at 1-800-343-TLAP (8527). Information about attorney wellness and other related information is also available on TLAP’s website, www.tlaphelps.org. If a lawyer is required to report under rule 8.03(a), that is, if he has knowledge “or suspects” another lawyer is “impaired by chemical dependency on alcohol or drugs or by mental illness,” the report may instead be made to TLAP and discharges the concerned lawyer’s duty to report. See Tex. Health & Safety Code § 467.005(b); Tex. Disciplinary Rules Prof’l Conduct R. 8.03(c). “Mental illness” encompasses Alzheimer’s disease, dementia, and other cognitive disorders. American Psychiatric Association, Diagnostic and Statistical Manual of Mental Disorders 591 (5th ed. 2013).
Calling TLAP about a fellow lawyer in need is a way to help an attorney with a problem without getting that attorney into disciplinary trouble. The confidentiality of TLAP participants’ information is ensured under Tex. Health & Safety Code § 467.007 and by TLAP policy. All communications by any person with the program (including staff, committee members, and volunteers) and all records received or maintained by the program are strictly protected from disclosure. TLAP does not report lawyers to disciplinary authorities. While the majority of calls to TLAP are self-referrals, referrals may also come from partners, associates, office staff, judges, court personnel, clients, family members, and friends. TLAP is respectful and discreet in its efforts to help impaired lawyers who are referred, and TLAP never discloses the identity of a caller trying to get help for another attorney. Furthermore, the Health and Safety Code provides that any person who “in good faith reports information or takes action in connection with a peer assistance program is immune from civil liability for reporting the information or taking the action.” Tex. Health & Safety Code § 467.008.
Approximately half of all assistance provided by TLAP is given to attorneys suffering from anxiety, depression, or burnout. Additionally, TLAP helps lawyers, law students, and judges suffering problems such as prescription and other drug use, eating disorders, gambling addictions, cognitive impairment, codependency, and many other serious issues.
Once a lawyer, law student, or judge is connected to TLAP, the resources that can be provided directly to that person include—
1.direct peer support from TLAP staff attorneys;
2.self-help information;
3.connection to a trained peer support attorney who has overcome the particular problem at hand and who has signed a confidentiality agreement;
4.information about attorney-only support groups such as Lawyers Concerned for Lawyers (weekly meetings for alcohol, drug, depression, and other issues) and monthly Wellness Groups (professional speakers on various wellness topics in a lecture format), which take place in major cities across the state;
5.referrals to lawyer-friendly and experienced therapists, medical professionals, and treatment centers; and
6.assistance with financial resources needed to get help, such as the Sheeran-Crowley Memorial Trust, which is available to help attorneys in financial need with the costs of mental-health or substance abuse care.
A detailed discussion of conflicts of interest is beyond the scope of this manual. Attorneys should incorporate a conflicts check in the processing of matters they are engaged to handle. See Tex. Disciplinary Rules Prof’l Conduct R. 1.06, 1.09.
See section 1.14 below regarding representation of multiple clients with claims against the same debtor.
§ 1.3:2Going into Business with Clients
See Tex. Disciplinary Rules Prof’l Conduct R. 1.08 regarding restrictions and disclosures that must be made before going into business with a client.
When a file is opened, the attorney should calendar the statute of limitations date to ensure that suits will be timely filed. A detailed discussion of statutes of limitations can be found in part III. in chapter 17 of this manual.
As the attorney works the file, a reminder or “tickler” should be made for its next retrieval date each time a case folder is returned to the filing system. Even if the next step will not occur until a response is received from the client, an entry should be made to ensure that the file will be reviewed regularly.
The attorney who does not use a tickler system or calendar important dates is inviting a malpractice claim. Many attorneys use computer programs as primary or backup tickler systems. Several dedicated programs have been created specifically for attorneys’ docket control needs, and other calendar programs or personal information managers serve much the same purpose. Regardless of the system used, a backup system should be put in place to minimize the possibility of human or computer error.
An attorney must hold all funds and other property belonging to clients, such as retainers and funds for paying court costs, separate from the attorney’s own property. These funds must be kept in a separate account designated as a “trust” or “escrow” account. The attorney must keep complete records of the account funds and preserve the records for five years after termination of the representation. Tex. Disciplinary Rules Prof’l Conduct R. 1.14(a). Practitioners must also comply with the applicable rules governing Interest on Lawyers Trust Accounts programs under article XI of the State Bar Rules.
The attorney must promptly notify the client of the receipt of any funds for the client, must promptly deliver to the client any funds to which the client is entitled, and must, on request by the client, promptly render a full accounting of the funds. Tex. Disciplinary Rules Prof’l Conduct R. 1.14(b).
§ 1.5:2Debtor’s Payments on Account
An integral part of a collections practice is receiving and accounting for payments received from debtors. These funds must be placed in the attorney’s trust account when received, the debtor’s account must be promptly credited for the payment, and the funds must be disbursed (both to the attorney for fees earned and to the client) as soon as practicable after the funds clear. The engagement agreement may include the method and manner of disbursement and the attorney’s authority to receive payments on the client’s behalf. An authorization agreement is at form 1-3 in this chapter. A record of the debtor’s payments is at form 1-4. See also chapter 4 in this manual.
§ 1.6Taxation of Debt Collection Services
Legal services to collect debts are apparently exempt from sales tax unless the attorney is acting in a transaction as nothing more than a debt collector. Tex. Att’y Gen. Op. No. JM-823 (1987); see also Texas Comptroller of Public Accounts Private Letter Ruling 9301L1222F05. (See https://comptroller.texas.gov/taxes/letters-rulings/ for information on the binding effect of Private Letter Rulings.)
However, other businesses engaged in a debt collection service (any activity to collect or adjust a delinquent debt, to collect or adjust a claim, or to repossess property subject to a claim) are subject to sales tax. Tex. Tax Code § 151.0036(a); see also 34 Tex. Admin. Code § 3.354. Tax is due on the total charge for debt collection activity when the last known address of the debtor in the creditor’s records, at the time the account is placed for collection, is located in Texas; and the creditor for whom the debt is collected is located in Texas or is engaged in business in Texas, as provided in Tex. Tax Code § 151.107, at the time debt is referred for collection. 34 Tex. Admin. Code § 3.354(b)(1). The term debt collection service does not include the collection of court-ordered child support or medical child support or the collection of current credit and real estate accounts. Tex. Tax Code § 151.0036(b); see also 34 Tex. Admin. Code § 3.354(d). “A current credit or real estate transaction is one that has not exceeded the later of the due date of the payment or the date on which a penalty or other contractual sanction attaches.” 34 Tex. Admin. Code § 3.354(b)(2). Fees for dishonored checks are taxable, while late charges are considered additional interest and not debt collection charges. 34 Tex. Admin. Code § 3.354(b)(2)–(3).
§ 1.7Bonding of Attorneys and Nonattorney Employees
Debt collectors who collect consumer claims in Texas must be bonded. Attorneys are considered debt collectors for bonding purposes. Because the amount of bond is nominal and given the continued attempts by consumer advocates and attorneys to expand the reach of the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692–1692p, and Texas Debt Collection Practices Act, Tex. Fin. Code §§ 391.001–.404, the attorney is encouraged to obtain and file a bond with the Texas secretary of state. See section 2.32:4 in this manual for more detailed discussion.
[Sections 1.8 through 1.10 are reserved for expansion.]
An attorney must keep the client reasonably informed of the status of a matter, promptly comply with reasonable requests for information, and explain matters to the extent reasonably necessary to permit the client to make informed decisions regarding representation. Tex. Disciplinary Rules Prof’l Conduct R. 1.03. Keeping the client informed typically consists of—
1.providing the client with copies of all pleadings, motions, and correspondence;
2.informing the client in writing of actions the attorney is taking; and
3.if the engagement agreement is for an hourly fee, providing regular invoices, itemized with the actions taken by the law firm.
A forwarder is an agent for a creditor-client who refers claims to attorneys for collection. A forwarder may be another attorney, a collection agency, a credit bureau, a credit insurance company, or any other entity that acts on behalf of the creditor in the referral of claims for collection. The forwarding contract should specify, at least, the agreed fee to be paid as the attorney’s compensation for effecting collection.
Every forwarder has very specific operating procedures. These procedures can range from one page to more than thirty pages. Most operating procedures discuss reporting, remittances, fees, and what happens when certain events occur such as bankruptcy, death, or a request to close the account. Before accepting files, the attorney should review these procedures and make sure he understands the agreement and can ethically agree to the requirements. Failure to object or advise that the attorney is unable or unwilling to abide by a term could be a breach of fiduciary duty and possibly subject the attorney to disciplinary action.
§ 1.13Authority to Sue or Take Other Action
Unless the engagement agreement provides otherwise, mere employment of an attorney to collect a claim does not confer authority to sue, and mere forwarding of a claim for collection does not warrant commencement of a suit. An attorney should not file suit unless there is specific authority from the creditor or forwarder to do so. See form 1-5 in this chapter, which is a letter recommending suit but stating that no action will be taken without authorization.
§ 1.14Multiple Clients with Claims against Same Debtor
Occasionally an attorney will receive claims against one debtor from more than one client. An attorney may represent multiple clients if the attorney reasonably believes the representation of each client will not be materially affected and if each affected or potentially affected client consents to the representation after full disclosure of the existence, nature, implications, and possible adverse consequences of the common representation and the advantages and disadvantages involved, if any. Tex. Disciplinary Rules Prof’l Conduct R. 1.06(c).
A lawyer owes a duty of loyalty to every client; therefore, a potential conflict generally arises when one law firm represents multiple parties in a single lawsuit, for example, a class of plaintiffs, or when one law firm represents two parties in a single action where the funds are insufficient to satisfy both parties. Tex. Disciplinary Rules Prof’l Conduct R. 1.06(b) & cmt. 1. A potential conflict could arise in a debt collection scenario if the defendant were to attempt to settle multiple lawsuits with one settlement offer, thus forcing the firm’s clients to vie for the funds. While the clients’ interests in such a scenario are not directly adverse, the comments to rule 1.06 suggest that the lawyer analyze the situation from the client’s point of view. See, e.g., Tex. Disciplinary Rules Prof’l Conduct R. 1.06 cmt. 6. This requires a two-step analysis. First, the attorney should determine whether representation of multiple creditors against the single defendant will materially affect the firm’s representation of any of the creditor-clients. If representation will materially affect the firm’s representation, then the firm should decline representation. If the firm determines that representation will not materially affect the firm’s representation of the creditors, then the firm should obtain client consent to representation. Tex. Comm. on Prof’l Ethics, Op. 641 (2014).
Practice Note: As a practical matter, many clients will consider multiple representation a benefit and an advantage, since the firm will have gained knowledge regarding the debtor through discovery in the other matters.
It is permissible for a creditor’s attorney to represent several creditors against a single debtor in separate lawsuits as long as the clients are fully informed of the potential for a conflict to arise in the future, and the clients consent. Disclosure and consent are not formalities. The disclosure and consent need not necessarily be in writing, but it would be prudent for the attorney to provide potential dual clients with at least a written summary of the considerations disclosed. Tex. Disciplinary Rules Prof’l Conduct R. 1.06 cmt. 8. The more limited the debtor’s resources become, the more likely that the representation will give rise to an actual conflict of interest if each creditor cannot be made whole. The attorney has the immediate duty, on receipt of a second or subsequent claim against the same debtor, to fully inform the creditor or forwarder of all facts or to return the second or subsequent claim with a full explanation.
§ 1.15When to Recommend Not Filing Suit
The attorney may consider recommending not filing suit if—
1.the debtor cannot be located;
2.the debtor has not responded to demands for payment, and the amount involved is too small to justify filing suit;
3.the debtor’s assets would not be sufficient to satisfy or substantially contribute toward satisfaction of a judgment; or
4.the debtor disputes the claim and alleges a plausible affirmative defense or counterclaim, and the time and expense involved in handling a contested suit on his claim cannot be justified.
Reassessment in the future of any of these considerations may be warranted as long as limitations are not imminent.
§ 1.16Declining Representation
Attorneys decline to represent clients for a variety of reasons, including conflict with a current or former client, a claim that is barred or close to being barred by limitations, or failure to provide sufficient documentation to prosecute the claim. An attorney declining the matter must clearly state in writing that he is doing so and must take all reasonable steps to mitigate the consequences to the client. This typically takes the form of a letter to the client advising that the client may want to consult other attorneys and, if appropriate, that the failure to take action may result in the claim’s being barred by limitations.
§ 1.17Withdrawal from Representation
§ 1.17:1When Withdrawal Is Necessary
An attorney will occasionally find it desirable or even mandatory to withdraw from representing a client. This occurs most frequently if the client will not cooperate with the attorney in furnishing information or responding to inquiries. Withdrawal from employment is permitted in several circumstances, including if a client insists on pursuing an objective that the attorney considers repugnant or imprudent or with which the attorney has fundamental disagreement, or if the client fails substantially to fulfill an obligation to the attorney regarding the attorney’s services, including an obligation to pay the attorney’s fee as agreed, and has been given reasonable warning that the attorney will withdraw unless the obligation is fulfilled. Tex. Disciplinary Rules Prof’l Conduct R. 1.15(b)(4), (b)(5).
§ 1.17:2If Matter Is in Litigation
An attorney seeking to withdraw from pending litigation must file a written motion showing good cause for the withdrawal. If another attorney is to be substituted, the motion must state—
1.the name, address, telephone number, fax number (if any), and State Bar number of the substitute attorney if determined;
2.that the party approves the substitution; and
3.that the withdrawal is not sought for delay only.
If another attorney is not being substituted, the motion must state—
1.that a copy of the motion has been delivered to the party;
2.that the party has been notified in writing of his right to object to the motion;
3.whether the party consents to the motion;
4.the party’s last known address and other contact information; and
5.all pending settings and deadlines.
If the motion is granted, the withdrawing attorney must immediately notify the party in writing of any additional settings or deadlines of which the attorney has knowledge at the time of withdrawal and of which he has not already notified the party. The court may impose further conditions. Notice to the party must be given either in person or by certified and regular mail sent to the party’s last known address. Tex. R. Civ. P. 10.
An attorney who withdraws from employment should give reasonable notice to the client, allowing time for employment of other counsel; surrender papers and property to which the client is entitled; and refund any advance payment of a fee that has not been earned. The attorney may keep papers relating to the client to the extent permitted by law only if the client will not be prejudiced as a result. Tex. Disciplinary Rules Prof’l Conduct R. 1.15(d).
§ 1.17:4Attorney’s Fees after Wrongful Discharge
An attorney who is wrongfully discharged by the client should be able to recover a fee either under the client contract or under a quantum meruit theory. See Mandell & Wright v. Thomas, 441 S.W.2d 841, 847 (Tex. 1969); Diaz v. Attorney General, 827 S.W.2d 19, 22–23 (Tex. App.—Corpus Christi–Edinburg 1992, no writ). However, this rule “assumes an enforceable fee contract, and it is the plaintiff’s burden to establish the existence of a valid contract.” Tillery & Tillery v. Zurich Insurance Co., 54 S.W.3d 356, 360 (Tex. App.—Dallas 2001, pet. denied).
§ 1.18Attorney’s Engagement Agreements with Client
A comprehensive discussion of attorney’s engagement agreements is beyond the scope of this manual. The attorney should have a written engagement agreement with the client, such as the one found at form 1-2 in this chapter. Also, an engagement agreement calling for a contingency fee must be in writing to be enforceable and must state the method by which the fee will be determined; the percentage or percentages that will accrue to the attorney if there is a differentiation in the percentages in the event of settlement, trial, or appeal; the litigation and other expenses that will be deducted from the recovery; and whether such expenses will be deducted before or after the contingency fee is calculated. Tex. Disciplinary Rules Prof’l Conduct R. 1.04(d). At the conclusion of the contingent fee matter, the attorney must provide the client with a written statement describing the outcome of the matter and showing the remittance to the client and the method of its determination if there is a recovery. Tex. Disciplinary Rules Prof’l Conduct R. 1.04(d).
If the attorney has not regularly represented the client, the basis or rate of the fee must be communicated to the client in writing. Tex. Disciplinary Rules Prof’l Conduct R. 1.04(c). A contingent fee agreement must be in writing, state the percentage fee, and be signed by the client. Tex. Disciplinary Rules Prof’l Conduct R. 1.04(d).
Additional terms that may be included in the contract include—
•a description of excluded services;
•whether costs are advanced or reimbursed by the client;
•if the matter is initially placed on a contingency basis, a statement that an hourly fee agreement will apply should the defendant file a counterclaim, request sanctions, appeal, or make some other claim for affirmative relief;
•a security interest in any recovery;
•an agreement by the client to furnish a witness to make affidavits, respond to discovery, give a deposition, attend a mediation, and attend and testify at trial;
•a notice to the client to preserve relevant e-mails and other records relevant to the case;
•an arbitration clause; and
•an explanation of the grievance process.
An agreement in an attorney engagement contract to submit disputes to arbitration is enforceable, including disputes over fees and attorney malpractice claims. See Royston, Rayzor, Vickery & Williams, LLP v. Lopez, 467 S.W.3d 494 (Tex. 2015) (enforcing agreement to arbitrate attorney malpractice claims); Porter & Clements v. Stone, 935 S.W.2d 217, 220–22 (Tex. App.—Houston [1st Dist.] 1996, no writ) (dispute over fees). The manual committee makes no recommendation about whether an arbitration clause should be included in the contract.
A form for a contingent fee contract for a collections matter is at form 1-2 in this chapter.