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Lawyers hold a unique vantage point in their clients’ financial lives because they often encounter the earliest indicators of financial distress — sometimes before clients fully recognize the problem themselves.
How lawyers respond in these moments can fundamentally shape both client outcomes and professional risk exposure.
Warning signs
Financial distress often makes its appearance without warning. It unfolds through subtle patterns and specific financial indicators that lawyers are well-positioned to notice. The business client who always paid his retainers without delay wants to explore alternative payment protocols. The real estate deal becomes stuck, because the buyer fails to deliver earnest money by the deadline. The estate administration process reveals unexpected creditor demands that exceed the available assets. The corporate minutes show that shareholders used their funds to lend money to help the company pay its operational expenses.
These signals appear in the ordinary course of legal work but require deliberate observation to detect. The primary difficulty arises when distinguishing short-term cash flow problems from long-term financial stressors that may require external assistance. A single late payment could be a simple oversight. However, multiple instances of delayed responses about financial documentation, avoidance of balance sheet discussions or urgent transaction requests should prompt lawyers to inquire further.
The duty to inquire
When warning signs arise, lawyers face a professional obligation extending beyond basic caution. Indiana Rule of Professional Conduct 1.4 requires lawyers to keep clients reasonably informed and to explain matters to the extent necessary for clients to make informed decisions. When financial distress threatens the viability of a legal matter or the client’s broader interests, silence becomes untenable.
However, the conversation needs not be confrontational to be effective. Lawyers should frame inquiries around the immediate legal work. The approach could be as follows: “To properly advise you on this transaction, I need to understand your current financial position.” Or one could say, “These creditor claims may affect our estate planning strategy — let’s review the full picture.” This approach respects client autonomy while fulfilling professional responsibilities.
Strategic response options
After detecting indications of financial problems, lawyers should transition from passive observation to active counseling. The immediate question is whether the current legal matter should proceed as planned, be restructured or be paused entirely.
A business acquisition that made sense three months ago may be unsound if the buyer’s financing has deteriorated. A litigation strategy built on the assumption of adequate resources may need recalibration if the client faces liquidity constraints.
This is also the moment to consider whether the client needs specialized assistance. Many lawyers hesitate to suggest that clients consult bankruptcy counsel, financial advisers or restructuring specialists, fearing it implies inadequacy in their own representation. But the opposite is true. Recognizing the limits of one’s expertise and connecting clients with appropriate resources demonstrates professional judgment and serves the client’s interests far better than attempting to navigate complex financial distress without proper guidance.
Managing professional risk
Financial distress in clients creates tangible risks for their lawyers. The most obvious concern is nonpayment for services, but the stakes extend much further. Lawyers who continue working on matters without addressing underlying financial instability may later face claims that they failed to advise clients adequately or that they should have recognized the futility of the representation sooner.
This is where clear engagement letters become essential. When financial concerns arise mid-representation, consider supplementing the original agreement with written confirmation of the scope of services, the limits of your financial expertise and any recommendations you have made regarding additional professional assistance. Document key conversations about the client’s financial situation and your advice. And, if you recommend pausing legal work until financial issues are resolved, memorialize those recommendations in writing.
Fee arrangements may also need adjustment. Advance retainers and regular payment schedules protect both lawyer and client by ensuring that work performed is work that can be paid for, avoiding the difficult situation in which substantial legal services become uncollectible.
The practical imperative
Ultimately, addressing financial distress early serves everyone’s interests. Clients benefit from clear-eyed assessment of their situations and strategic pivots when circumstances demand them. Lawyers avoid the professional and financial complications of representations that become unmanageable. And the legal matter itself (whether a transaction, litigation or planning engagement) has a better chance of achieving meaningful results when financial realities are acknowledged and incorporated into strategy from the outset.
The lawyer who spots financial warning signs and responds with informed judgment is not overstepping professional bounds but rather is fulfilling the most fundamental aspect of effective representation. Seeing clearly, advising honestly and helping clients navigate toward the best available outcomes given present circumstances are all fundamental aspects to effective representation.•
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Llewellyn is an associate attorney with Riley Bennett Egloff LLP in Indianapolis. Opinions expressed are those of the author.
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