Collections 101 · The money
The money coming back
Payments arrive, sit in trust, and are remitted to the client. Every part of that is regulated, reconciled and audited.
It is not the firm's money
The single most important sentence in this lesson: money collected on a client's account belongs to the client from the moment it arrives. The firm's fee is earned out of it, but the money is not the firm's until that fee is properly taken.
That is why collected funds go into a client trust account, separate from the account the firm pays its own bills from, and why the rules around those accounts are strict and unforgiving. Mishandling client funds is one of the few operational errors in this industry that ends careers rather than producing a corrective action plan.
How money arrives
Cheques in the post, handled by the mailroom under a different procedure from correspondence. Card and bank payments taken on inbound calls or through a payment page. Scheduled arrangements that draw automatically. Direct payments the consumer made to the creditor rather than to you, which have to be reported back so the balance stops being wrong. And, on judgment accounts, money arriving through a court or an employer rather than from the consumer.
Every one of those has to land against the right account with the right date. A payment applied to the wrong account is two errors at once: one consumer is credited with money they did not pay, and another is still being pursued for money they did.
Trust accounting and reconciliation
A client trust account holds money belonging to other people. Keeping it correct is not a monthly tidy-up; it is a control with a defined shape. The discipline has a name — three-way reconciliation — and it means the bank's record, the firm's own record of the account, and the sum of every individual client's balance within it all agree. If they do not agree, something is wrong, and finding out what is not optional.
The compliance reference on this site sets out what the sources actually require. The operational point is that a collector's accuracy feeds it: a misapplied payment is a reconciliation break somebody has to chase.
Remittance, fees and net-back
On a schedule set by the placement agreement, the firm remits: it pays the client what it has collected, less the contingency fee it has earned and any recoverable costs the agreement allows it to deduct, and sends a statement showing account by account what was collected and what was deducted.
That statement is where the commercial relationship becomes visible. The number the client cares about is not what you collected but what it received — net-back — and the agreement's definitions of recoverable cost and of whether costs come off before or after the fee decide it as much as the fee percentage does.
For a new hire, the useful thing to carry out of this lesson is the loop. The client places accounts, the firm works them under the client's standards, money comes back through a trust account that has to reconcile, and the client compares what it received against what it placed. Everything in the earlier lessons — the flags in the data file, the received date in the mailroom, the disposition code, the media request — exists so that loop can be closed with evidence rather than with assurances.
What this looks like in practice
Illustrative. A payment posts to AP-20240006 on the fifteenth. It lands in the trust account, is applied to that account with that date, and shows on the client's next remittance statement with the fee calculated at the tier the agreement sets for this placement.
In the same run, a second payment cannot be matched to any account because the reference on the cheque is a number that does not exist. It is not applied to the closest match. It sits unapplied and visible until somebody identifies it, because an unapplied payment is a known problem and a wrongly applied one is a hidden one.
What to carry out of this lesson
- Collected money belongs to the client and is held in trust.
- Three-way reconciliation is the control that proves the trust account is correct.
- A misapplied payment creates two errors, one of them invisible.
- Net-back, not gross collections, is what the client is measuring.
Key terms
Defined once, in the glossary. These link to the definition and its sources.
- IOLTAAn IOLTA is an interest- or dividend-bearing lawyer trust account in which interest earned on pooled client funds is remitted to a state bar foundation to fund legal services rather than paid to the lawyer or the client.
- Three-way reconciliationA three-way reconciliation proves that the trust account's general ledger balance, the sum of all individual client ledger balances, and the adjusted bank statement balance are identical as of the same date.
- RemittanceRemittance is the scheduled transfer of collected funds from the firm's trust account to the creditor client, net of the firm's earned fee and any agreed costs, accompanied by an account-level accounting.
- Contingency feeA contingency fee is a fee payable to the collections firm as an agreed percentage of amounts actually collected, earned only on recovery rather than billed for time.
- Net-backNet-back is the amount a creditor actually retains from a placement after the firm's contingency fee, court costs, and other recoverable expenses are deducted from gross collections.
Where the rules are written down
This lesson describes how the work is done. What the law requires is set out in the reference, with its primary sources.
- Client Trust Accounting for Collections Firms: What Does Three-Way Reconciliation Actually Require?Three-way reconciliation for collections law firms: which three balances must agree, how often each state requires it, and what the lawyer must sign and retain.
This is an informational reference, not legal advice, and using it creates no attorney-client relationship. Limitations periods turn on facts this page cannot know — which state's law governs, the contract type, when the claim accrued, and whether anything tolled or revived it. Confirm against the primary source and your own counsel before acting.