The Unlikely Reason the Recession is Killing Legal Aid for the Poor - Seattle News - The Daily Weekly

The Unlikely Reason the Recession is Killing Legal Aid for the Poor - Seattle News - The Daily Weekly

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With the nation mired in the Great Recession, the Federal Reserve slashed interest rates to virtually zero in hopes of spurring economic growth. While generally regarded as a sensible and effective strategy, the tactic has had the unintended consequence of crippling hundreds of non-profit organizations that offer legal services for the needy.
Many of these organizations rely on a little-known source of funding that is contingent on interest rates. Called IOLTA -- Interest on Lawyer Trust Accounts -- these funds help sustain groups that provide invaluable services such as helping people gain access to food stamps, claim veteran's benefits, resolve disability claims, and much more. Nationwide, IOLTA is the second largest source of funding for legal aid behind the federal government.

The system exists because of a quirk in the way lawyers do business. By law, attorneys are not allowed to mingle client funds with their own operating expenses. That means that when a lawyer receives a chunk of change like a settlement, he or she must put the money in a separate trust account before it can be doled out. The interest that is generated as it sits untouched is typically mere pennies on the dollar.

Technically, that spare change belongs to clients, not attorneys. But the amount is so negligible that it's not worth the hassle to make the transaction. In order for the lawyers to reimburse their clients, they would have to fill out a 1099 tax form, send it to the IRS, wait for a reply, and then, finally, cut the check. In some cases, it could cost 50 bucks to get five.

Every state in the union has established some sort of system to collect these leftover dollars and redistribute them to groups that assist poor folks in court. The program here is managed by the Legal Foundation of Washington, which subsidizes 22 different organizations statewide.

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