Aug. 5 (Bloomberg) -- Partners at top-grossing U.S. law firms, once able to draw advances against expected annual profit, have found the credit crunch is limiting the amount they take home.

Most firms don't know how much income there will be to divide at the end of the year, with one legal consultant projecting as much as a 15 percent drop. To protect against overspending by the firms, some lawyers are being forced to take out interest-bearing bank loans if they want cash beyond the monthly minimums dictated by their partnership agreements.

``On an industrywide basis, it has never happened before,'' said Andrew Johnman, head of Barclays Plc's U.S. professional- services team. ``In the past, there has always been enough confidence that profits will come.''

With deal volume down 34 percent this year, according to data compiled by Bloomberg, and less litigation in general, law firms are cutting expenses wherever they can. It's the first major belt-tightening since the technology bubble burst and the economy slowed after the Sept. 11, 2001, terrorist attacks.

Partners at some of the 100 leading firms by revenue --where the median share of earnings was $1.2 million in 2007 --can expect their take in 2008 to drop as much as 15 percent, said Bruce MacEwen, a New York legal and economic consultant. The median is based on compilations in the American Lawyer, a trade magazine.

Legal Spillover

Since credit markets in London and New York seized up a year ago, the world's biggest banks and brokerages have been forced to book more than $480 billion of writedowns and credit losses; the chief executives of UBS AG, Citigroup Inc., Merrill Lynch & Co., Wachovia Corp. and American International Group Inc. have resigned or been ousted; and the economy has slowed to a recession-like pace.

That slump cut deep into the business of law firms that thrived on financial deal-making for much of their revenue. Many firms are now finding it necessary to borrow 25 percent more than last year to run the business, Johnman said.

This is ``a balancing game of: How much can we pay the partners and get away with it?'' Johnman said. His clients include 15 of the 50 highest-grossing U.S. law firms, according to the banker.

A firm Johnman declined to identify is arranging for personal loans from Barclays of at least $250,000 per partner until the profit comes in, he said. Previously the business would have advanced the money, borrowing if necessary, but now attorneys pay the 3.5 percent interest, he said.

Limiting the Advance

Law firm partners get a monthly draw from earnings, typically $25,000 when the equity holders make $1 million a year each, Johnman said. Distributions of the difference usually come at the middle and end of the year. The firm where Johnman is setting up the loans canceled its midyear payment. Its monthly payout hasn't changed, he said.

Partner requests for credit lines ``are up substantially,'' said Dan DiPietro, head of law firm client relations at Citigroup Inc.'s Citi Private Bank, declining to give exact figures.

DiPietro said he works with about 650 law firms. Some are ``exercising tough love,'' cutting distributions to urge partners to help collect fees from clients, DiPietro said.

``That's a very direct way for a firm to deliver a message to the partners that collections aren't where they should be,'' DiPietro said. ``Corporate clients, because of their own problems, have slowed up their payments.''

Start-Date Delays

A handful of top firms are firing lawyers and staff. Some are delaying start dates for newly hired first-year associates, a move that may later damage their reputations and hurt recruiting at law schools, said Stanley Kolodziejczak in New York, co- chairman of the PricewaterhouseCoopers law firm services group.

``If you cut too deep in your talent pool, then you're not in a position to take advantage of the rebound,'' he said.

At least 10 firms have fired experienced associates since the credit crisis crippled structured finance, real-estate and private-equity legal practices.

Cadwalader, Wickersham & Taft, the oldest continuously operating law firm in the U.S., announced the firing of 96 lawyers on July 30, only seven months after 35 others in the same group were dismissed. At its peak, the New York-based firm had 720 lawyers. Now it has 580.

Adviser to many of the largest investment banks, including Morgan Stanley and Merrill Lynch & Co., Cadwalader was the seventh-most-profitable U.S. law firm in 2007, with per-partner income of $2.7 million, according to the American Lawyer.

Sonnenschein Cuts

Sonnenschein, Nath & Rosenthal, home to author Scott Turow, fired 37 attorneys and 87 support staff in May. The 700-lawyer firm, based in Chicago, terminated six partners, four experienced salaried attorneys and 27 associates, mostly in real estate and litigation.

``Many of our peer firms are doing the same thing,'' Sonnenschein Chairman Elliott Portnoy said. Sonnenschein says it had per-partner earnings of $915,000 last year.

The firm also pushed back the starting date for 20 of its 24 incoming first-year associates from September to Nov. 15, spokeswoman Linda Butler said.

Thelen Reid Brown Raysman & Steiner -- a 550-lawyer New York-based firm whose partners earned $810,000 on average in 2007 -- delayed start dates for 39 incoming associates from Sept. 22 till Jan. 5, saving as much as $1.8 million in salaries.

Thelen fired 26 lawyers in March, mainly in structured finance and real estate, spokesman Kevin Livingston said.

Thelen Merger Talks

The firm is pursuing a merger, Chairman Stephen O'Neal said in an e-mail to lawyers. Livingston said Thelen is in preliminary talks with other firms, which he declined to identify.

Some law firms may extend fewer offers to their summer associates this year, rather than in busy times when it's not rare for an entire class to be hired.

``Just keeping your nose clean and not getting drunk may not be enough this year,'' MacEwen said. Summer associates ``need to perform and less than all of the class will get offers.''

Besides limiting advances to partners, the financial squeeze means fewer salaried lawyers are being made equity partners, and members of firms are being asked to retire early, said Peter Haugh in Charlotte, North Carolina, managing executive of Wachovia Wealth Management's legal specialty group.

``Firms are really watching expenses in every way they can, from the associate program up to the partner level,'' Haugh said.

Wachovia's clients, who include about 40 of the 100 highest- grossing law firms, are also borrowing as much as 25 percent more than last year, drawing deeper on existing credit facilities, Haugh said.

When it comes to revenue and profit, ``if you're flat this year, that would be pretty good,'' Kolodziejczak of PricewaterhouseCoopers said.

To contact the reporter on this story: Lindsay Fortado in New York at lfortado@bloomberg.net.

Last Updated: August 5, 2008 11:30 EDT