IOLTA Overdraft: How a Bounced Check Spent Other Clients' Money
Sam's List Editorial | 2026-09-30
The trust account did not go negative when the check bounced. That was the problem.
Illustrative anonymized composite, drawn from recurring patterns rather than a single engagement. Nothing here is guaranteed or predictive.
A settlement check came in on a Monday. The firm deposited it, and by Wednesday the bank showed the money as available. The firm cut checks to the client, to a medical provider holding a lien, and to itself for the fee. The following week the settlement check came back returned. By then the money had been paid out, and the only reason the account did not show an IOLTA overdraft that day was that other clients' money was sitting in it.
Law firm trust accounting is the specialty of Legal Ease Bookkeeping, a Fort Worth firm that works with law firms nationwide. We come back to how a firm like that fits at the end.
The Firm, and Why the IOLTA Overdraft Came Late
The firm in this composite is a four-lawyer personal injury practice. One IOLTA account, a practice management system that tracked matters, and a bookkeeper who reconciled the bank statement monthly.
The settlement was $62,000. The check looked like any other settlement check. The bank made the funds available within two business days, as banks routinely do, and "available" is the word that does the damage. Available means the bank will let you spend it. It does not mean the check has been paid by the bank it was drawn on.
When the check was returned, the bank reversed the $62,000 deposit. The account balance dropped, but it stayed positive, because roughly $140,000 belonging to other clients was also in the account. Nobody's statement said "overdraft." What had actually happened is that three disbursements on one client's matter had been funded with money belonging to eleven other clients.
The limitation of hindsight: the firm did nothing unusual. It followed the bank's availability, which is what most small firms do. That is exactly why this pattern recurs.
The Good Funds Rule Is the Rule That Would Have Stopped It
Many states have a good funds rule for trust accounts. The general shape: a lawyer may disburse against a deposit only once the funds are actually collected, or once the deposit is a type the rule treats as good funds, such as a wire or certain certified instruments. The exact list differs by state, and some states have no written rule and rely on the general duty not to use one client's money for another.
An ordinary check that the bank has made "available" is often not good funds under these rules. The distinction exists precisely because a check can be returned days after the bank shows it as spendable.
The limitation: waiting for collection costs clients time, and clients waiting on settlement money complain. A firm that holds disbursements has to explain why, and the explanation has to be written into the engagement letter or the settlement statement before the money arrives, not after.
What the Bank Did Next: Trust Account Overdraft Notification
Two weeks later, one of the disbursement checks was presented at a moment when the account balance, after other routine activity, could not cover it. That was the actual IOLTA overdraft, and it was small: a few thousand dollars, for about a day.
It did not stay private. Many states require banks holding lawyer trust accounts to agree to trust account overdraft notification: when a trust check is presented against insufficient funds, the bank reports it to the state bar or disciplinary counsel, whether or not it pays the check. The firm learned about it from a letter asking for an explanation and records.
The limitation: an overdraft notice is not a finding of misconduct. Plenty of notices close after the firm documents a bank error or an honest mistake it has already fixed. But the firm has to produce the records to show that, and producing them is where this firm's real problem surfaced.
Reconstructing the Month
The bar asked for the bank statements, the client ledgers and the reconciliations for the period. The firm had the bank statements. It had matter records in the practice management system. What it did not have was a three-way reconciliation, meaning the bank statement, the trust account register and the sum of every individual client ledger agreeing to each other.
The monthly reconciliation had matched the bank statement to the firm's trust register. It had never checked that the individual client balances added up to the same number. So when the returned check was reversed, the register showed the reversal, but no client ledger did. On the books, the settlement client's ledger still showed $62,000 received and paid out, as if the deposit had cleared, and every other client's balance looked untouched.
| Measure | What the firm's records showed | What was actually true |
|---|---|---|
| Bank balance after reversal | Matched the register | Matched the register |
| Settlement client's ledger | $62,000 received, then disbursed to zero | $62,000 disbursed against nothing |
| Other eleven clients' ledgers | Unchanged | Collectively short by the disbursed amount |
| Three-way reconciliation | Never run | Would have failed the first month |
The rebuild took about three weeks of bookkeeping work: reverse the deposit on the right ledger, post the shortfall, and show the firm restoring the money to the account from operating funds.
The limitation: the reconstruction made the records accurate. It did not make the underlying event go away, and how the bar weighs a situation like this depends on the jurisdiction and the full facts.
The Fix: Three Controls That Prevent the Next IOLTA Overdraft
No disbursement until funds are good. The firm added a line to its disbursement checklist: identify how the settlement arrived and confirm it meets the state's good funds rule before any trust check is written. Wires clear this almost immediately. Checks wait.
A ledger check before every trust check. Before a check is cut, someone confirms that the specific client's ledger holds at least that amount in collected funds. The bank balance is not the test, because the bank balance includes everyone.
A monthly three-way reconciliation, signed. Bank, register and the total of client ledgers, reconciled and signed off by a lawyer, every month.
The limitation: controls reduce the odds and shorten the time to discovery. They do not remove the risk of a returned deposit, and a counterfeit-check scheme aimed at law firms is designed to beat a careless process, and it can beat a careful one too. What they change is that the next returned check gets caught before anyone else's money is spent.
Where a Law Firm Bookkeeping Specialist Fits
Legal Ease Bookkeeping is a law firm bookkeeping specialist based in Fort Worth, Texas. It was founded in 2016, has 12 employees, serves firms nationwide, and lists a minimum of $500,000 in revenue. Its profile's display name is Legal Ease Bookkeeping.
The relevance to this composite is the monthly three-way reconciliation. That is a discipline, not a software feature, and it is the thing a generalist bookkeeper most often skips because the bank statement already "matches."
Legal Ease has 9 verified client reviews on Sam's List as of 2026-09-30. Each review is submitted by an individual who identifies as a client of the firm and rates it on communication, subject-matter knowledge, and overall satisfaction. Reviews reflect those individual experiences and do not represent an endorsement by Sam's List. Legal Ease is a paid Sam's List member. Ratings and rankings are not indicative of future performance or results.
The limitation, plainly: a bookkeeping firm keeps and reconciles the records. It does not advise on your ethics obligations or respond to the bar for you, and the lawyer remains responsible for the trust account under every state's rules. The $500,000 minimum also puts the smallest practices outside its range.
Frequently Asked Questions
What happens after an IOLTA overdraft?
In many states, the bank reports the overdraft to the state bar or disciplinary counsel, and the lawyer is asked to explain it and produce records. Many notices close once the lawyer shows the cause was an error that has been fixed. The outcome depends on the jurisdiction and the facts.
What is the good funds rule?
A good funds rule says a lawyer may disburse from trust only against funds that have actually been collected, or against deposit types the rule treats as good funds, such as wires. The details differ by state. The point is that a check the bank shows as available can still be returned days later.
Why didn't the account show a negative balance when the check bounced?
Because other clients' money was in the same pooled account. The reversal lowered the balance but did not push it below zero. That is why the bank balance is never the test for whether one client's disbursement is funded.
How often should a law firm run a three-way reconciliation?
At least monthly. Many states require monthly reconciliation; some require it quarterly. It compares the bank statement, the trust register and the total of all client ledgers. A firm that matches only bank to register can miss exactly the kind of problem in this composite.
If your firm reconciles the trust account to the bank and has never added up the client ledgers, start there this month. You can browse bookkeepers on Sam's List, including the firm above.
About the author: Kimberly Green is cofounder of Sam’s List, a directory and matching platform for financial professionals.
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