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The Escheatment Process

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By Michael C. Dennis, MBA, CBF and Steven Kozack

Reversing dormant account credit memos and payments is unlawful

Every day, many companies across America do something unlawful - they reverse credit memos and on account payments from accounts that are dormant, or from customers that have gone out of business, or from customers that do no realize that the seller owes them money [in the form of credit memos or unapplied cash.] This is unlawful because companies are required to report when property has been abandoned or unclaimed to the State in every State in the Union.

Because a seller/creditor does not have the right to arbitrarily reverse credits or write off unapplied cash under the laws of escheatment, the company should make a reasonable effort to locate and notify the owner of the abandoned property. If a creditor is unable to do so, and if the credit balances have remained unclaimed for the time period specified by applicable State law, the creditor must report the account to the State ---- and it must remit to the State the credit balance through a process called "escheatment." Specifically, creditors are required to remit payment to the State each year it holds escheatable funds that have exceeded the dormancy period permitted by law. Each State provides a form for the creditor's use in making an annual report and payment of escheatable funds. The State will hold the money indefinitely for the benefit of the rightful owner.

Failure to report unclaimed property, or conversion of unclaimed property [such as writing off credits or on-account cash] may subject a creditor company to penalties including fines, penalties, interest and other damage claims. These can be asserted against a creditor even if the mishandling of escheatable property is the result of poor bookkeeping or sloppy record-keeping practices.

To avoid problems and penalties, creditors should:

  • Maintain proper accounting systems,

  • Develop controls to prevent credits from being absorbed

  • Write policies and procedures that describe the escheatment process in the State or States in which the company does business

  • Create reports that identify and age on-account cash, and open credit memos

The best way to avoid escheatment problems is to maintain clean accounts. This means working hard to reconcile accounts on a regular basis. It also involves issuing credits in a timely manner, and working with customers to find out how payments are to be applied - and encouraging customers to use credit memos issued to them.

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