IBR for Solos? Forum

[Anonymous User]

How does this work? How do they determine income?

[ggocat]

why so anonymous?

[ResolutePear]

why so anonymous?

Wanting institutional assistance is clearly a sign off weakness.

[A'nold]

Didn't mean to post this anon.

[ggocat]

It's a good question. I've never spoken to a financial aid specialist about it, but it looks like IBR uses your adjusted gross income from the prior year. So if you are hanging a shingle right out of school, for the first year you would probably defer/forbear on the loans. In the following years, I imagine they just use your adjusted gross income from your first year as a solo.

But I bet your financial aid office can give you a correct answer. Certainly class of 2010 is facing this issue now, and some in class of 2009 faced it.

[A'nold]

It's a good question. I've never spoken to a financial aid specialist about it, but it looks like IBR uses your adjusted gross income from the prior year. So if you are hanging a shingle right out of school, for the first year you would probably defer/forbear on the loans. In the following years, I imagine they just use your adjusted gross income from your first year as a solo.

But I bet your financial aid office can give you a correct answer. Certainly class of 2010 is facing this issue now, and some in class of 2009 faced it.

Yeah, this issue seems like a very important thing to think about.

As for me, I've kind of been doing some soul-searching lately and I really, really think that I want to become a personal injury attorney. Only thing is, most firms pay lowly associates absolute crap. I think I might work a few years at one of these shops (unless I can land one of the few great PI associate jobs, then I might work there longer), build up experience and research the hell out of owning my own firm, then use my savings to open up shop. I'd rather spend a few years in the trenches barely scraping by at 60k or less than make that working long hours making someone else rich.

Something someone said in another thread (quoting an attorney they know) made a lot of sense about how every lawyer should always be working towards the goal of owning their own firm.

[ggocat]

Any PI firm that pays fresh associates $60K is probably a good PI firm. Some of the best lawyers I've met/seen in action are PI lawyers. They understand trial strategy like none other.

Have you decided on the transfer decision yet?

If you're considering solo operation, Foonberg's book is considered among many to be the bible of solo practice.

[A'nold]

Any PI firm that pays fresh associates $60K is probably a good PI firm. Some of the best lawyers I've met/seen in action are PI lawyers. They understand trial strategy like none other.

Have you decided on the transfer decision yet?

If you're considering solo operation, Foonberg's book is considered among many to be the bible of solo practice.

Nice. I will definitely buy it.

Yeah, I mean, I think I'll take any PI gig I can get, even a bilboard/daytime t.v. ad kind of place just to get into the trenches and learn the ropes. I work for brilliant attorneys right now and would much prefer to learn from the likes of these guys, but you gotta take what you get, right?

[A'nold]

Bump.

[XxSpyKEx]

Have you worked at a PI shop yet? ... Not many people actually want to do that type of work that have actually tried it out. Also, going solo will mean even more hours, less money, and has even less of a chance of success. Just grab a local phone book. The one in cook county has about 70 pages filled with small law firms, and most of those do PI work. Your odds of surviving are not good. Obviously, it's less competitive in a smaller market, but nonetheless it's still a huge risk and take a lot of business skills to succeed. Although, arguably it's not much different then trying to start a restaurant or bar -- it's something that can be done, but you really need to offer something that no one else is offering or easily able to imitate. I guess more than anything it's all about acknowledging the risk beforehand.

Why do you want to transfer if this is your goal? Why don't you just try to get out of law school for as cheap as possible because no debt, or close to no debt will make opening up your own shop more realistic because realistically you are going to work a LOT for the first few years and will gross negative returns. Yes, you heard that correctly, most businesses actually lose money when they first start out, and there is no way you can do that unless you have money saved up or somehow raise capital for your business (unlikely). Obviously, making negative income and repaying your student loans is not exactly realistic, which is why it makes sense to not have any debt coming out of law school. The other thing is that it doesn't make a lot of sense to go to a top law school and incur debt for this type of work because nobody cares where you went to school. These types of clients don't know or care about what the difference between new york university or new york law school is, which is why there really isn't much incentive for the PI shops to care either. Furthermore, most grads at these PI shops went to relatively shitty law schools and are probably bitter about the fact that fresh t14 grads at large firms are making more money than they are late into their careers, so they would rather hire grads from their own TTT law schools, as oppose to some dude to went to XYZ t14 law school.

[A'nold]

Have you worked at a PI shop yet? ... Not many people actually want to do that type of work that have actually tried it out. Also, going solo will mean even more hours, less money, and has even less of a chance of success. Just grab a local phone book. The one in cook county has about 70 pages filled with small law firms, and most of those do PI work. Your odds of surviving are not good. Obviously, it's less competitive in a smaller market, but nonetheless it's still a huge risk and take a lot of business skills to succeed. Although, arguably it's not much different then trying to start a restaurant or bar -- it's something that can be done, but you really need to offer something that no one else is offering or easily able to imitate. I guess more than anything it's all about acknowledging the risk beforehand.

Why do you want to transfer if this is your goal? Why don't you just try to get out of law school for as cheap as possible because no debt, or close to no debt will make opening up your own shop more realistic because realistically you are going to work a LOT for the first few years and will gross negative returns. Yes, you heard that correctly, most businesses actually lose money when they first start out, and there is no way you can do that unless you have money saved up or somehow raise capital for your business (unlikely). Obviously, making negative income and repaying your student loans is not exactly realistic, which is why it makes sense to not have any debt coming out of law school. The other thing is that it doesn't make a lot of sense to go to a top law school and incur debt for this type of work because nobody cares where you went to school. These types of clients don't know or care about what the difference between new york university or new york law school is, which is why there really isn't much incentive for the PI shops to care either. Furthermore, most grads at these PI shops went to relatively shitty law schools and are probably bitter about the fact that fresh t14 grads at large firms are making more money than they are late into their careers, so they would rather hire grads from their own TTT law schools, as oppose to some dude to went to XYZ t14 law school.

I appreciate the sentiment but I think you are a little too negative about a few things.

1) Contrary to what is said on this site, opening up a solo shop, especially a PI type firm where you do not have to convince higher scale people to use you, is not actually like opening a restaurant. Law was always historically a solo endeavor and not until recently has the associate firm model really taken hold for a good portion of law students.

2) The point of this thread was irt IBR, so the amount of debt I incur doesn't really matter. IBR goes off of gross income, not amount taken out. I mean, if you struggle for a few years at first, your school loan payments will be extremely low. Once you make enough to pay full price for your loans, you will likely be a lot more comfortable and will be able to make the payments. Years down the road, you will likely be wealthy if you are any good at the PI game.

Btw- every PI lawyer I have ever met that went solo has done very well for themselves. Most people hate the work. I love it, actually. I've met quite a few millionaire PI attorneys and they all love what they do. To each his own. But, I'll say it again: PI is not like opening up some kind of contractual law firm where you "build a book of business," it is an inconsistent stream of business where you win some and lose some and some that you "win" can launch you immediately into wealth.

I have experience w/ a firm where a 500k settlement is chump change that "gets them through the next month and helps pay the overhead." The cases they work on are not necessarily earth shattering either, yet they do have many of those as well.

Edit: re transferring: I'm basically doing this for myself and it was never really about OCI. I'm willing to take on an extra 60k in debt to go to a school I can be proud graduating from.

[XxSpyKEx]

1) Contrary to what is said on this site, opening up a solo shop, especially a PI type firm where you do not have to convince higher scale people to use you, is not actually like opening a restaurant. Law was always historically a solo endeavor and not until recently has the associate firm model really taken hold for a good portion of law students.

That's not what I meant. I meant opening up a solo shop (or a law firm where you hire other attorneys) is like starting a business, which is exactly what it is. IMO, with how many lawyers are out there it isn't much more shielded from competition than something like a restaurant or a bar (regardless of whether you are a solo or hire other attorneys as well).

2) The point of this thread was irt IBR, so the amount of debt I incur doesn't really matter. IBR goes off of gross income, not amount taken out. I mean, if you struggle for a few years at first, your school loan payments will be extremely low. Once you make enough to pay full price for your loans, you will likely be a lot more comfortable and will be able to make the payments. Years down the road, you will likely be wealthy if you are any good at the PI game.

Is this correct? I don't know much that much about IBR, but can you really have a payment of $0 if you work 40 hours /week and make negative returns? Would you need to bill 40 hours /week to utilize IBR?

IMO, the 25 year IBR is always the losing repayment method, unless you plan on being crappy lawyer and never making more than $60K /year (or being forced out of the profession). The reason I say this is because say 10 years down the road say you are making $120K /year, then your loan payments are $18K /year and will only rise as you make more money. If you were to do a 10 year repayment you would have only paid around that same amount for 10 years total. Realistically, I think most lawyers that manage to succeed in the profession make at least $100K /year 10 years out (even public defender salaries in Chicago, a city that starts PDs out at $49K /year, are up there the last time I checked). I think in the long run you wind up paying a LOT more money and uncle sam wins with 25 year IBR.

Btw- every PI lawyer I have ever met that went solo has done very well for themselves.

That's surprising. Did you meet mostly lawyers that just started their shops or where doing it for sometime now? ... If it's the latter, then I don't think it's really that indicative of the average PI solo because that sample set doesn't include any of the PI solos that failed (it's kinda like talking only to business owners that have owned their businesses for 5+ years that made it through the rough patch and succeeded, which doesn't account for the 50% that failed within the first year or two -- according to the SBA over 50% of small businesses fail in their first year).

Edit: re transferring: I'm basically doing this for myself and it was never really about OCI. I'm willing to take on an extra 60k in debt to go to a school I can be proud graduating from.

Best of luck man. Where have you gotten in so far? ... BTW- I've followed a lot of your posts and will be a bit disappointed if you disappear without ever telling us all what happened with your transfer cycle.

[A'nold]

1) Contrary to what is said on this site, opening up a solo shop, especially a PI type firm where you do not have to convince higher scale people to use you, is not actually like opening a restaurant. Law was always historically a solo endeavor and not until recently has the associate firm model really taken hold for a good portion of law students.

That's not what I meant. I meant opening up a solo shop (or a law firm where you hire other attorneys) is like starting a business, which is exactly what it is. IMO, with how many lawyers are out there it isn't much more shielded from competition than something like a restaurant or a bar (regardless of whether you are a solo or hire other attorneys as well).

2) The point of this thread was irt IBR, so the amount of debt I incur doesn't really matter. IBR goes off of gross income, not amount taken out. I mean, if you struggle for a few years at first, your school loan payments will be extremely low. Once you make enough to pay full price for your loans, you will likely be a lot more comfortable and will be able to make the payments. Years down the road, you will likely be wealthy if you are any good at the PI game.

Is this correct? I don't know much that much about IBR, but can you really have a payment of $0 if you work 40 hours /week and make negative returns? Would you need to bill 40 hours /week to utilize IBR?

IMO, the 25 year IBR is always the losing repayment method, unless you plan on being crappy lawyer and never making more than $60K /year (or being forced out of the profession). The reason I say this is because say 10 years down the road say you are making $120K /year, then your loan payments are $18K /year and will only rise as you make more money. If you were to do a 10 year repayment you would have only paid around that same amount for 10 years total. Realistically, I think most lawyers that manage to succeed in the profession make at least $100K /year 10 years out (even public defender salaries in Chicago, a city that starts PDs out at $49K /year, are up there the last time I checked). I think in the long run you wind up paying a LOT more money and uncle sam wins with 25 year IBR.

Btw- every PI lawyer I have ever met that went solo has done very well for themselves.

That's surprising. Did you meet mostly lawyers that just started their shops or where doing it for sometime now? ... If it's the latter, then I don't think it's really that indicative of the average PI solo because that sample set doesn't include any of the PI solos that failed (it's kinda like talking only to business owners that have owned their businesses for 5+ years that made it through the rough patch and succeeded, which doesn't account for the 50% that failed within the first year or two -- according to the SBA over 50% of small businesses fail in their first year).

Edit: re transferring: I'm basically doing this for myself and it was never really about OCI. I'm willing to take on an extra 60k in debt to go to a school I can be proud graduating from.

Best of luck man. Where have you gotten in so far? ... BTW- I've followed a lot of your posts and will be a bit disappointed if you disappear without ever telling us all what happened with your transfer cycle.

Haha, no, I definitely won't disappear. I will be a TLS leach for some time.

I appreciate your posts and that point about only talking to successful PI lawyers is definitely a valid point.

As for the whole "the 25 year IBR is always a losing proposition" statement: I would tend to agree, however, in this situation I would only use it for a couple of years until I nailed a "good case" where I get a decent chunk in a settlement or verdict and I'd try to basically pay off the debt in one gigantic glob. PI is funny that way. It's not really like a steady stream of $$. It comes and goes. But it only takes ONE good case to get a few hundred k payday. Like, 1/3 of a 600k settlement, which kind of settlements happen every day.

If you are working as a solo, I'm sure at least one of these cases are bound to come around w/in 5 years, considering most solos I know in this line of business get tons of these per year. The 20k settlement fender bender cases can keep you afloat until the bigger cases come around.

[A'nold]

Bump.

So, isn't there a way to pump $ back into the business instead of taking a bigger salary in order to build up your practice for a few years? Like don't pay yourself a 70k salary and instead pay yourself 50k to avoid the higher federal tax bracket AND get a lower IBR payment?

[ggocat]

Bump.

So, isn't there a way to pump $ back into the business instead of taking a bigger salary in order to build up your practice for a few years? Like don't pay yourself a 70k salary and instead pay yourself 50k to avoid the higher federal tax bracket AND get a lower IBR payment?

Would require knowledge of allowable business entities for lawyers in your state and method of taxation for each of those entities (assuming IBR is based on AGI).

Generally, it would be better to get that extra $20K and pay off loans than to try and fudge IBR. I mean... IBR takes 25 years to get rid of your loans through forgiveness.

I don't think tax rates will benefit you by structuring as a professional corporation (the only entity I can think of that will allow you to "hold" profits). The corporation is taxed at 35% on any annual profits that exceed expenditures (including salaries). So if you make $70K and only pay yourself a salary of $50K, that $20K is taxed at 35%. Then, when you eventually pay that $20K to you as a salary next year (or what's left of it after corporate taxes), it's taxed again on your individual income tax return. There is "double tax."

I think many firms are structured as LLPs, LLCs, or PLLCs. Those business entities all utilize passthrough taxation. All profits of the business (net income minus expenditures, depreciation, etc.) will pass to the individual automatically. So even if you keep that $20K in your company's operating account, you're still taxed on it in your individual income tax return.

PS -- I've never taken business organizations or corporate tax, so take this all with a huge grain of salt.

EDIT: but if by "pump into the business" you mean make a bunch of purchases or business expenditures, then yeah, you can do that. But no sense in spending money on stuff you don't need. Might as well just pay off loans.

[Anonymous Loser]

If you are working as a solo, I'm sure at least one of these cases are bound to come around w/in 5 years, considering most solos I know in this line of business get tons of these per year. The 20k settlement fender bender cases can keep you afloat until the bigger cases come around.

5 years of low-value PI cases is a long time, particularly when you are inexperienced, and therefore inefficient. Contingent fee rate structures are great if you are dialed in, but you will get pwned trying to figure it all out: there are only 24 hours in a day, no matter how hard you work. If you are seriously considering this route, please enroll in some sort of Business Associations course as well as a basic Income Tax course in the upcoming semester.

[A'nold]

Bump.

So, isn't there a way to pump $ back into the business instead of taking a bigger salary in order to build up your practice for a few years? Like don't pay yourself a 70k salary and instead pay yourself 50k to avoid the higher federal tax bracket AND get a lower IBR payment?

Would require knowledge of allowable business entities for lawyers in your state and method of taxation for each of those entities (assuming IBR is based on AGI).

Generally, it would be better to get that extra $20K and pay off loans than to try and fudge IBR. I mean... IBR takes 25 years to get rid of your loans through forgiveness.

I don't think tax rates will benefit you by structuring as a professional corporation (the only entity I can think of that will allow you to "hold" profits). The corporation is taxed at 35% on any annual profits that exceed expenditures (including salaries). So if you make $70K and only pay yourself a salary of $50K, that $20K is taxed at 35%. Then, when you eventually pay that $20K to you as a salary next year (or what's left of it after corporate taxes), it's taxed again on your individual income tax return. There is "double tax."

I think many firms are structured as LLPs, LLCs, or PLLCs. Those business entities all utilize passthrough taxation. All profits of the business (net income minus expenditures, depreciation, etc.) will pass to the individual automatically. So even if you keep that $20K in your company's operating account, you're still taxed on it in your individual income tax return.

PS -- I've never taken business organizations or corporate tax, so take this all with a huge grain of salt.

EDIT: but if by "pump into the business" you mean make a bunch of purchases or business expenditures, then yeah, you can do that. But no sense in spending money on stuff you don't need. Might as well just pay off loans.

Damn that was a very thorough and enlightening post. Thanks.

I was just talking about the first couple of years, but if it doesn't make sense, then oh well.

I still am EXTREMELY curious as to how the IBR peeps figure your income for repayment purposes. They wouldn't use gross proceeds, right? I mean that would be completely messed up.

[A'nold]

If you are working as a solo, I'm sure at least one of these cases are bound to come around w/in 5 years, considering most solos I know in this line of business get tons of these per year. The 20k settlement fender bender cases can keep you afloat until the bigger cases come around.

5 years of low-value PI cases is a long time, particularly when you are inexperienced, and therefore inefficient. Contingent fee rate structures are great if you are dialed in, but you will get pwned trying to figure it all out: there are only 24 hours in a day, no matter how hard you work. If you are seriously considering this route, please enroll in some sort of Business Associations course as well as a basic Income Tax course in the upcoming semester.

Great advice, actually. I was going to try to avoid tax classes but if I'm planning on opening my own firm one day, I should take it for that reason.

[como]

The post about taxation was great, but you also have to consider the liability issues of operating as a sole proprietorship. Unlimited liability. God forbid, you could be on the hook for todo.

[ggocat]

The post about taxation was great, but you also have to consider the liability issues of operating as a sole proprietorship. Unlimited liability. God forbid, you could be on the hook for todo.

I'm pretty sure a lawyer is personally liable for his own malpractice regardless of the business entity.

[como]

The post about taxation was great, but you also have to consider the liability issues of operating as a sole proprietorship. Unlimited liability. God forbid, you could be on the hook for todo.

I'm pretty sure a lawyer is personally liable for his own malpractice regardless of the business entity.

But malpractice is only one mode of liability. There might be other benefits of limited liability, no?

[ggocat]

The post about taxation was great, but you also have to consider the liability issues of operating as a sole proprietorship. Unlimited liability. God forbid, you could be on the hook for todo.

I'm pretty sure a lawyer is personally liable for his own malpractice regardless of the business entity.

But malpractice is only one mode of liability. There might be other benefits of limited liability, no?

Good point. You might not be personally liable for other debts. Again, I'm no expert, but I would guess that it could be difficult getting a significant amount of credit if you operate as a business with limited liability. At least if you don't have limited liability, the creditor knows you're "on the hook" for the debt, whereas you could just close up shop if you have limited liability, and the creditor gets screwed.

Certainly there are resources for figuring out the best entity. Jay Foonberg's book might address it, and many state bars have "start up" guides for new lawyers.

[XxSpyKEx]

A sole proprietorship nowadays is pretty retarded. There's really no good reason anyone would ever have one, except that they just don't know better. E.g. your secretary is out at lunch, and crashes her car into pedestrian; pedestrian is a quadriplegic; you get sued; pedestrian can take everything you have instead of just what your business is worth (e.g. pedestrian could even dip into your trust fund that you acquired before you started the business, etc.). Not really the best of examples, but if you're creative you can think of a billion other ways you can get screwed as a result of having a sole proprietorship.

[A'nold]

A sole proprietorship nowadays is pretty retarded. There's really no good reason anyone would ever have one, except that they just don't know better. E.g. your secretary is out at lunch, and crashes her car into pedestrian; pedestrian is a quadriplegic; you get sued; pedestrian can take everything you have instead of just what your business is worth (e.g. pedestrian could even dip into your trust fund that you acquired before you started the business, etc.). Not really the best of examples, but if you're creative you can think of a billion other ways you can get screwed as a result of having a sole proprietorship.

That sounds about right.

I wonder if that is true about not getting business loans if you do something other than a sole proprietorship. I've never heard anything like that before.......

Also, does anyone know about how IBR would work with this?

[XxSpyKEx]

A sole proprietorship nowadays is pretty retarded. There's really no good reason anyone would ever have one, except that they just don't know better. E.g. your secretary is out at lunch, and crashes her car into pedestrian; pedestrian is a quadriplegic; you get sued; pedestrian can take everything you have instead of just what your business is worth (e.g. pedestrian could even dip into your trust fund that you acquired before you started the business, etc.). Not really the best of examples, but if you're creative you can think of a billion other ways you can get screwed as a result of having a sole proprietorship.

That sounds about right.

I wonder if that is true about not getting business loans if you do something other than a sole proprietorship. I've never heard anything like that before.......

Also, does anyone know about how IBR would work with this?

Because it's not true. However, you need collateral to get loans. You won't get unsecured loans on the corporation when you just start out... basically you'll need to put up your house and other assets to get a loan.