I’m going to continue on the theme of solo practice if you don’t mind. One of the lines of comments from my prior post showed a depressing and dangerous misconception: that IBR will save you from the financial devastation of opening up a solo practice. In essence, the line of thought was that if you're not earning anything, your student loans technically don't matter under IBR. And on the surface, that sounds reasonable. No income, no payments. But that doesn't make starting a solo practice a smart idea, or something that has no risk because of IBR.
Here’s why: most new solos are losing money each month, not making money or breaking even. And IBR is a one-way street. By that, I mean if you’re making only a little money, your payments will be small, but if you’re losing money, your IBR payments will not be negative. You're still losing money. IBR doesn't help someone whose business is not profitable. IBR doesn't give you a refund.
For those who have not yet experienced solo practice, or for those who still think that when all else fails, they’ll just hang out a shingle and let IBR take care of all their financial worries, let me walk you through a typical day as a solo in terms of your net income rather than time. Note that this is a low-budget solo practice – while I’m sure someone could run a practice for far less (and while I'm sure some readers will miss the point entirely and write comments like "no way rent costs that much!" or "I can buy 1000 pens for $10 on eBay"), I would argue that it will always cost you about twice what you expect it to cost to keep a new small business afloat, especially with the complete lack of experience possessed by most fresh law graduates when it comes to running a business. Don’t underestimate the fixed costs of running a low-budget law practice – the main saving you could make is on office space, but things like malpractice insurance, bar dues, CLEs, advertising and marketing costs, office supplies, and phone/data are generally fixed and unavoidable. Off to work we go...
8:00am Show up at office. Get coffee. The rent is costing at least $500 per month, perhaps closer to $1,000 if it’s in a larger city, utilities included. Let's split the difference and say that the office, with basic utilities included, is $750 per month. Currently, you're $-750 for the month.
8:15am Go through emails. Nothing but junk messages from companies trying to sell you things (research tools, advertising, CLEs, client leads etc.) No new business in here.
8:30am Go through voicemails. Just one, from a client who has some “questions” about a bill you sent. Uh oh.
9:00am Call client back. Client complains that the $800 bill you sent for working on his divorce last month – the matter that took you about twenty hours when all was said and done, and which was the only paying matter you worked on recently – was far too high, despite most of the additional work being because of lies the client told throughout the representation which made a simple case into something difficult. You agree to discount the bill by half after he threatens to file a complaint. Income from this matter this month: $400, so now you're only $-350 for the month.
9:30am Go through mail. Nothing but bills. Bar dues - $240 annually ($20 this month). Lexis (yes, you signed up for that waste of money) is $150 this month. Your phone/data plan $50 this month. Now you're at a net loss of $-570.
10:00am Leave office to attend CLE. Maybe only $100 this month, maybe more considering parking, tolls, gas and so forth - all those little things that people just forget as a cost of doing business. Hope to network with other attorneys and find referral business, but you soon realize that they are all there for the same thing. Nobody has any clients. So far, this month is now $-870.
12:00pm Lunch with one of your few clients, at the client’s request – just to “catch up” (i.e. get a free meal). Unsurprisingly, the client has nothing new for you to work on. Lunches cost you $200 per month, so now you're at $-1,070 this month.
2:00pm Back at office. Spend an hour writing a "practice alert” for your clients, then another hour mailing out one hundred copies of a letter plus two-page factsheet to local business and your few existing clients. Mailing cost is $100 (good paper, stamps, envelopes, labels), plus you now need to buy a new printer cartridge. Net $-1,170.
2:30pm Phone rings. You spend the next half hour giving out free legal advice to a prospective client. You put the phone down and realize that this prospective client has obviously asked the same question to three other attorneys, has now received answers to every part of his legal jigsaw puzzle and doesn’t need a lawyer anymore. But you can bet that he’ll be calling you in two months to complain about your bad free advice when his pro se representation goes wrong. Remember that malpractice carrier is calling you back later this afternoon.
3:30pm Email arrives from Google. Your online advertising and marketing has cost you $200 this month. Net $-1,370.
4:00pm Back from Staples with printer cartridge, plus supplies - paper, pens (clients love to steal your pens), and assorted bits and pieces that every office needs - $150 this month. Now you're net $-1,520.
4:30pm Malpractice insurance rep calls. Your rates are being adjusted. You now pay $2,400 per year. Write check for $200 for this month. Net $-1,720.
5:00pm Phone has not rung once all day with any new business. You call it quits.
5:30pm Get home. On the way, you pick up dry cleaning ($30 this month) and run by the store for a new white shirt ($50) after one of your pens leaked all over it. Gas for all this driving around? $100 this month. But the student loan bill arrives. You owe $750 this month, but - yay! - IBR takes care of this and you owe a grand total of $0 for your loans because your business is so bad. So you're now down a mere $-2,000 for this month for everything directly related to your law practice.
Don't even think about hiring a secretary.
This is a typical day. Your business costs alone this month – just the costs to keep your office open – come to a net loss of around $2,000. This doesn’t include your home rent, living expenses, any form of health insurance, retirement, car payment, credit cards, vacation, or anything that’s not directly related to your law career - let's say that will cost you an additional $2,000 per month. As you can see, the solo practice is running at a massive net loss. You need clients. But where on earth are those $4,000 of billables coming from ($2,000 to cover the costs of the business, and $2,000 to live off)? And where is it coming from next month? And after that? It's a non-stop battle.
While IBR will save you having to pay the student loan bill, it’s not going to refund you the $2,000 you’ve just flushed down the toilet trying to start your law firm this month (and the next, and the next, and so forth). IBR may be a great tool for those who are entering low-paid jobs, but IBR is a useless tool for those who are trying to start a business and who may have a net loss for many months (or years).
Saving $750 on your student loans via IBR is costing you $2,000. Only an idiot pays $2,000 to save $750.
Then comes the follow-up comments along the lines of, "So you should do nothing instead?"
Actually, yes. Or not nothing - just avoid solo practice, which is universally a bad business decision (see my earlier post if you still don't get why). Here’s your homework. Assume you’re a new law grad, $150,000 in debt (although IBR makes this "disappear" for now). How many months can you afford to keep up this charade of “solo practice” before all of your savings have disappeared if you estimate that you're losing $2,000 per month, every month, even on IBR, and the $2,000 you need to live on? Because you'll find you have rather less time than you think to get on your feet, which, at $4,000 per month, will cost you another $50,000-200,000 in cash (that no bank will lend you except perhaps on a credit card at 29.99%) before you can even think of breaking even, and that's assuming that the market for lawyers doesn't get any worse.
Think of IBR not as a blessing, but as a sign that you are failing financially. The idea that IBR is a good thing is wildly inaccurate, because it's nothing more than a sign that your business is not working. Anyone touting it as a benefit for solo practitioners (and anyone else self-employed in the legal world) is wrong, and is relying on logic equivalent to saying something similar to "being on food stamps is great because you get free food," ignoring the fact that life is often pretty miserable for those so low on the economic totem pole, and often doesn't get much better.
I'll be the first to admit that the above figures are ballpark estimates to prove a point (although they're not far off what I experienced when I took a few steps down the solo practice road). But the underlying point stands - if you're not running a profitable solo practice, IBR isn't your friend and it won't insulate you from business losses incurred by trying to go solo.
Charles Cooper is the author, along with Thane Messinger, of “Con Law: Avoiding...or Beating...the Scam of the Century (The Real Student's Guide to Law School and the Legal Profession)”, in addition to being the moderator at Nontradlaw.net and the author of “Later in Life Lawyers”. He can be contacted at charlescooperauthor@gmail.com.
Here’s why: most new solos are losing money each month, not making money or breaking even. And IBR is a one-way street. By that, I mean if you’re making only a little money, your payments will be small, but if you’re losing money, your IBR payments will not be negative. You're still losing money. IBR doesn't help someone whose business is not profitable. IBR doesn't give you a refund.
For those who have not yet experienced solo practice, or for those who still think that when all else fails, they’ll just hang out a shingle and let IBR take care of all their financial worries, let me walk you through a typical day as a solo in terms of your net income rather than time. Note that this is a low-budget solo practice – while I’m sure someone could run a practice for far less (and while I'm sure some readers will miss the point entirely and write comments like "no way rent costs that much!" or "I can buy 1000 pens for $10 on eBay"), I would argue that it will always cost you about twice what you expect it to cost to keep a new small business afloat, especially with the complete lack of experience possessed by most fresh law graduates when it comes to running a business. Don’t underestimate the fixed costs of running a low-budget law practice – the main saving you could make is on office space, but things like malpractice insurance, bar dues, CLEs, advertising and marketing costs, office supplies, and phone/data are generally fixed and unavoidable. Off to work we go...
8:00am Show up at office. Get coffee. The rent is costing at least $500 per month, perhaps closer to $1,000 if it’s in a larger city, utilities included. Let's split the difference and say that the office, with basic utilities included, is $750 per month. Currently, you're $-750 for the month.
8:15am Go through emails. Nothing but junk messages from companies trying to sell you things (research tools, advertising, CLEs, client leads etc.) No new business in here.
8:30am Go through voicemails. Just one, from a client who has some “questions” about a bill you sent. Uh oh.
9:00am Call client back. Client complains that the $800 bill you sent for working on his divorce last month – the matter that took you about twenty hours when all was said and done, and which was the only paying matter you worked on recently – was far too high, despite most of the additional work being because of lies the client told throughout the representation which made a simple case into something difficult. You agree to discount the bill by half after he threatens to file a complaint. Income from this matter this month: $400, so now you're only $-350 for the month.
9:30am Go through mail. Nothing but bills. Bar dues - $240 annually ($20 this month). Lexis (yes, you signed up for that waste of money) is $150 this month. Your phone/data plan $50 this month. Now you're at a net loss of $-570.
10:00am Leave office to attend CLE. Maybe only $100 this month, maybe more considering parking, tolls, gas and so forth - all those little things that people just forget as a cost of doing business. Hope to network with other attorneys and find referral business, but you soon realize that they are all there for the same thing. Nobody has any clients. So far, this month is now $-870.
12:00pm Lunch with one of your few clients, at the client’s request – just to “catch up” (i.e. get a free meal). Unsurprisingly, the client has nothing new for you to work on. Lunches cost you $200 per month, so now you're at $-1,070 this month.
2:00pm Back at office. Spend an hour writing a "practice alert” for your clients, then another hour mailing out one hundred copies of a letter plus two-page factsheet to local business and your few existing clients. Mailing cost is $100 (good paper, stamps, envelopes, labels), plus you now need to buy a new printer cartridge. Net $-1,170.
2:30pm Phone rings. You spend the next half hour giving out free legal advice to a prospective client. You put the phone down and realize that this prospective client has obviously asked the same question to three other attorneys, has now received answers to every part of his legal jigsaw puzzle and doesn’t need a lawyer anymore. But you can bet that he’ll be calling you in two months to complain about your bad free advice when his pro se representation goes wrong. Remember that malpractice carrier is calling you back later this afternoon.
3:30pm Email arrives from Google. Your online advertising and marketing has cost you $200 this month. Net $-1,370.
4:00pm Back from Staples with printer cartridge, plus supplies - paper, pens (clients love to steal your pens), and assorted bits and pieces that every office needs - $150 this month. Now you're net $-1,520.
4:30pm Malpractice insurance rep calls. Your rates are being adjusted. You now pay $2,400 per year. Write check for $200 for this month. Net $-1,720.
5:00pm Phone has not rung once all day with any new business. You call it quits.
5:30pm Get home. On the way, you pick up dry cleaning ($30 this month) and run by the store for a new white shirt ($50) after one of your pens leaked all over it. Gas for all this driving around? $100 this month. But the student loan bill arrives. You owe $750 this month, but - yay! - IBR takes care of this and you owe a grand total of $0 for your loans because your business is so bad. So you're now down a mere $-2,000 for this month for everything directly related to your law practice.
Don't even think about hiring a secretary.
This is a typical day. Your business costs alone this month – just the costs to keep your office open – come to a net loss of around $2,000. This doesn’t include your home rent, living expenses, any form of health insurance, retirement, car payment, credit cards, vacation, or anything that’s not directly related to your law career - let's say that will cost you an additional $2,000 per month. As you can see, the solo practice is running at a massive net loss. You need clients. But where on earth are those $4,000 of billables coming from ($2,000 to cover the costs of the business, and $2,000 to live off)? And where is it coming from next month? And after that? It's a non-stop battle.
While IBR will save you having to pay the student loan bill, it’s not going to refund you the $2,000 you’ve just flushed down the toilet trying to start your law firm this month (and the next, and the next, and so forth). IBR may be a great tool for those who are entering low-paid jobs, but IBR is a useless tool for those who are trying to start a business and who may have a net loss for many months (or years).
Saving $750 on your student loans via IBR is costing you $2,000. Only an idiot pays $2,000 to save $750.
Then comes the follow-up comments along the lines of, "So you should do nothing instead?"
Actually, yes. Or not nothing - just avoid solo practice, which is universally a bad business decision (see my earlier post if you still don't get why). Here’s your homework. Assume you’re a new law grad, $150,000 in debt (although IBR makes this "disappear" for now). How many months can you afford to keep up this charade of “solo practice” before all of your savings have disappeared if you estimate that you're losing $2,000 per month, every month, even on IBR, and the $2,000 you need to live on? Because you'll find you have rather less time than you think to get on your feet, which, at $4,000 per month, will cost you another $50,000-200,000 in cash (that no bank will lend you except perhaps on a credit card at 29.99%) before you can even think of breaking even, and that's assuming that the market for lawyers doesn't get any worse.
Think of IBR not as a blessing, but as a sign that you are failing financially. The idea that IBR is a good thing is wildly inaccurate, because it's nothing more than a sign that your business is not working. Anyone touting it as a benefit for solo practitioners (and anyone else self-employed in the legal world) is wrong, and is relying on logic equivalent to saying something similar to "being on food stamps is great because you get free food," ignoring the fact that life is often pretty miserable for those so low on the economic totem pole, and often doesn't get much better.
I'll be the first to admit that the above figures are ballpark estimates to prove a point (although they're not far off what I experienced when I took a few steps down the solo practice road). But the underlying point stands - if you're not running a profitable solo practice, IBR isn't your friend and it won't insulate you from business losses incurred by trying to go solo.
Charles Cooper is the author, along with Thane Messinger, of “Con Law: Avoiding...or Beating...the Scam of the Century (The Real Student's Guide to Law School and the Legal Profession)”, in addition to being the moderator at Nontradlaw.net and the author of “Later in Life Lawyers”. He can be contacted at charlescooperauthor@gmail.com.
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