Escheat, and The Escheatment Process

Every State requires companies and financial institutions to report when property has been abandoned or unclaimed after a specified period of time. Before a creditor company can consider open credit memos or on account cash to be abandoned or unclaimed, it should try to locate the account owner. If the company is unable to do so, and if the credit balances have remained unclaimed for the period of time specified by State law (which varies from State to State), the creditor must report the account to the State where the account is held. The State then claims the credit balances through a process called "escheatment."

As part of the escheatment process, the creditor will be required to remit payment to the State each year of escheatable funds. Each State provides a form for the creditor's use in making an annual report of escheatable funds. (Escheatable funds are those that have been held for the maximum period allowed by that State's law). Typically, the form is available from the State Controller's Office (or the equivalent office or agency).

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 monetary penalties -- even when the mishandling of escheatable property is the result of poor bookkeeping or record keeping practices.

To avoid problems and penalties, creditor companies should maintain systems, controls, policies and procedures that adequately and effectively identify, age and account for escheatable property such as on-account cash.

What does this mean to the credit department? Some companies make a practice of reversing unused credits, or writing off on account cash after a relatively short period of time (typically three years or less). The laws of escheatment make it clear that this practice is unlawful - unless the creditor can document that the credit memo was issued in error or the on account payment was misapplied. Creditors should not write these items off. The customer should be notified and asked to use the credit balance as an offset against future purchases. If the customer cannot be found, and State law requires the creditor to send the money to the State the creditor must do so. If the customer later returns and demands their money, they should be referred to the appropriate State agency.

Source: Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.