The letter from your bank, or the email with the alarming subject line, lands and your whole day changes. An IOLTA overdraft notice is one of those things that makes an attorney's stomach drop, because it touches client money and it feels like everyone is about to be watching. So let me say the most important thing first. Take a breath. In the large majority of cases, an overdraft notice on a trust account is a bookkeeping event with a bookkeeping cause, and it is fixable. I have walked plenty of firms through exactly this, and the ones who slow down and work it methodically come out the other side just fine.
Let me explain what an overdraft notice really is, what to do first, and how the numbers side of a response works. One thing I will say up front, and again at the end, because it matters. I am an executive consultant with a bookkeeping background, not an attorney. I can show you how to trace and fix the numbers. Whether your notice triggers any duty to report or notify anyone is a legal and ethics question for your state bar or your own counsel, and I will point you there when it comes up.
What an overdraft notice actually is
An overdraft notice simply means that, at some moment, an item hit your trust account when the balance was not high enough to cover it. The bank may have paid the item and let the account go negative, or it may have returned it unpaid. On a normal business account that is an annoyance. On an IOLTA account it draws attention, because trust accounts are meant to hold client funds separately and are never supposed to dip below what you are holding for your clients.
Here is the part that helps. The notice is telling you that something moved through the account at the wrong time or in the wrong amount. That is a trail, and trails can be followed. The amount on the notice, and the date it happened, are your starting clues.
Do this first
Before you touch anything, slow down and protect the record. The worst moves I see are fast ones made in a panic.
Here is where to start:
- Keep the notice itself. Save the letter or email and note the exact date, the item involved, and the amount. That single document tells you where to point your reconciliation.
- Stop making new transactions in and out of the account until you understand what happened. Piling activity on top of a problem only makes it harder to see.
- Do not quietly move money from your operating account to paper over the gap before you know the cause. Plugging a hole you do not understand can create a bigger mess and can look worse than the original event.
- Pull your records together. You want the last several bank statements, your check register or software ledger, and the current balance for every client matter.
- Give yourself a quiet hour. This is detective work, and it rewards patience over speed.
Trace the cause in your ledgers
The heart of a trust account is the set of
client ledgers, which is just the running balance of what you are holding for each individual client. When an overdraft happens, it almost always means one client's balance was drawn down below zero, because a disbursement went out against funds that were not actually there yet, or were never there at all.
So the real work is to walk the timeline around the date on the notice. Post every deposit and disbursement to the right client, in the right amount, on the right date, and watch for the moment a matter goes negative. That is usually where your answer lives. This is very similar to tracing
an account that has come up short, and the two problems often share a root cause.
As you rebuild the picture, you are looking for the familiar culprits:
- A disbursement paid out before the matching deposit had actually cleared the bank
- A payment written against the wrong client matter, so one client's money covered another's check
- A deposit recorded in your books that bounced or never truly landed
- Bank fees or card processing fees pulled straight from the trust account, quietly draining it
- A simple data entry slip, a transposed figure, or a doubled entry
Most overdrafts trace back to timing or to a small human error, not to anything dramatic. Finding the exact one is what turns panic into a plan.
Prove it with a reconciliation
Once your ledgers are current, you run the reconciliation that shows whether the account is actually healthy. A proper three-way reconciliation matches three numbers that all have to agree:
- Your adjusted bank balance
- Your check register or book balance
- The total of all your individual client ledgers
When those three line up, you can breathe, because your records and your bank finally tell the same story. When they do not, the size and shape of the difference points you at the cause. A gap that matches one client's balance points at that matter. A small, odd figure often points at a bank fee. A round number frequently points at a misposted disbursement. The reconciliation does not just confirm the fix, it shows you where the fix belongs.
Correcting the account the right way
Once you know the cause, the correction is usually straightforward on the numbers side. If your own operating funds are owed to the account because fees were pulled from trust, you replace them and work with your bank so future fees come from operating instead. If a disbursement went out against uncleared funds, you document the timing and tighten your process so checks only go out against settled funds. The point is to make the account genuinely correct and to keep a clear, honest record of what happened and how you resolved it.
I want to be careful to stay in my lane here. Many banks report trust account overdrafts to the state bar automatically, and whether your notice carries any obligation to respond, report, or explain is a legal and ethics question that varies by state. That part belongs to your state bar or your own counsel, not to me. What I can tell you is that showing up with clean, reconciled records and a clear account of the cause is always the stronger position.
Keeping it from happening again
Once the immediate fire is out, it is worth stepping back. An overdraft is almost always a symptom of a process gap, so the durable fix is a rhythm that catches problems while they are still tiny. Reconcile monthly at a minimum, using the three-way method. Never disburse against a deposit until it has actually cleared. Keep client ledgers current rather than catching them up in a rush. And keep operating money and client money strictly separate, because that separation is the entire purpose of the account.
A trust account that keeps drifting is often a sign that
the rest of your firm's books could use attention too. If you would rather hand the trust piece off entirely, this is exactly the kind of
trust account management for law firms that we take on, and it may be the right moment to
bring in a specialist who does this every day.
A few quick questions I hear a lot
Does the bank automatically tell the state bar about an overdraft?
In many states, yes, banks that hold IOLTA accounts agree to report overdrafts. Whether that reporting creates any obligation on your end is a legal and ethics question, so check with your state bar or your own counsel. The bookkeeping response, tracing the cause and reconciling the account, is the same either way.
Should I move money in from operating to cover it right away?
Not before you know the cause. Replacing your own funds that are genuinely owed to the account is appropriate, but blindly plugging a gap you do not understand can hide the real problem and make things messier. Trace first, then correct with a clear record.
How fast do I need to sort this out?
Move promptly, but not frantically. A careful reconciliation in the first day or two beats a rushed guess. The goal is an account that is correct and a record you can stand behind.
Can this be fixed without it looking bad?
The aim is not to hide anything. It is to make the account correct and to have a clear record of what happened and how you fixed it. Clean, honest records protect you far better than a quiet patch ever could.
By Nettie Roos, founder of Rescue My IOLTA. Nettie is an executive consultant with a fractional CFO certification and a strong bookkeeping background, providing trust account management, fractional CFO services, bookkeeping and executive coaching for law firms. She is not an attorney.
Rescue My IOLTA provides bookkeeping and trust account compliance support, not legal advice. For legal or ethics questions specific to your firm, please consult your state bar or your own counsel.
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