1. SAM
  2. TOC
  3. 8700
  4. 8776-6
  5. 8776-6-JUN-2016

NONEMPLOYEE ACCOUNTS RECEIVABLE - 8776.6-JUN-2016

(Revised: 06/2016)

(Deleted and renumbered to 8293.1)

Each department will develop collection procedures that will assure prompt follow-up on receivables. Departments will use the following procedures and guidelines for the collection of amounts owed to the state from nonemployees. These procedures are in accordance with the Accounts Receivable Management Act as provided in Government Code (GC) sections 16580-16586.

Locating Debtor

When the address of the debtor is unknown, departments will attempt to obtain a current address. Departments may use Internet search engines and/or a data research service. Departments should perform a cost benefit analysis to determine if procuring services to locate debtors would be cost beneficial. Another alternative is to request the debtor’s address from the Department of Motor Vehicles by completing a Gov’t Agency Request for Driver License/Identification Record Information form, INF 254. For this alternative, the debtor’s date of birth or driver’s license/identification number is required.

Collection Letters

Departments are advised to use collection practices that are cost effective and consistent with their program goals and legal authority. Three documented letters should be made to collect on nonemployee delinquent accounts. However, departments have the option of making one documented letter before proceeding to the discharge of accountability process for nonemployee accounts receivable of $25 and under. This threshold applies to the total amount owed by the debtor, not to each invoice. The Discharge of Accountability section below provides more information regarding this process.

For the collection letter process, the department will send a sequence of three collection letters at a minimum of 30 day intervals. If a reply or payment is not received within 30 days after sending the first letter, the department will send a second letter. This follow-up letter will reference the original request for payment letter and will be stated in a stronger tone. If a response is still not received from the debtor, a third letter will be sent 30 days later. This last letter will include references to prior letters and will state what further actions, including collection fees, may be taken in the collection process.

Collection Fee

GC section 16583.1 allows departments to charge a reasonable fee, not to exceed the actual costs incurred by the department, to recover the department’s collection costs on past due ARs.

If a department plans to recover costs pursuant to this section, departments should consider actual costs incurred, including, but not limited to, staff time to send out collection letters, postage, equipment costs, and contingency fees for private collectors.

Departments will record this fee as revenue, Source Code 162100, Delinquent Receivables – Cost Recoveries.

Collection Actions Review

If the three collection letters are unsuccessful, departments will prepare a cost benefit analysis to determine the most efficient and effective collection method by initiating one or more of the following actions:

  1. Offset Procedures—An offset, is the interception and collection from amounts owed by other state departments to the debtor. For more offset information, see SAM section 8790.
  2. Court Settlements—There may be instances where it would be cost effective for departments to seek court judgments against debtors. Departments should consider the possibility of filing action in small claims courts. For larger sums, department counsel should be consulted for advice.
  3. Collection Agencies—Departments may consider contracting with another department that has a collection unit or with an outside collection agency.

The State Contracting Manual, the Public Contract Code section applicable to contracts for services, and GC section 19130 should be reviewed when a department is considering contracting with a collection agency. Any contract made with a collection agency must specify that all funds collected on behalf of a department will be remitted to that department. The collection agency can then be paid in one of several ways for its services - by a set fee per collection, on an hourly basis, or on a percentage basis, in arrears, based on services rendered.

Prior to assigning the debt to a collection agency, departments are required by law to notify the debtor in writing at the address of record that the alleged AR debt will be turned over for private collection unless the debt is paid or appealed within a specified time period.

Sale of ARs—Departments are authorized to sell ARs to private persons or entities. Departments will record the net income from the sale in their accounting records. Specific accounting entries for the sale of ARsare detailed in SAM section 10536, Standard Entry No. 36.

Prior to selling the debt, departments are required by law to notify the debtor in writing, at the address of record, that the alleged AR debt will be turned over for private collection unless the debt is paid or appealed within a specified time period.

Departments will select the collection actions that are likely to generate the highest net income and do not compromise future state income collections. In addition, departments should consult with the Franchise Tax Board or any other state department that has successfully established an effective AR collection system to develop methods for improving their collection rate. 

Discharge from Accountability

If all reasonable collection procedures do not result in payment, departments may request discharge from accountability of uncollectable amounts due from private entities. Departments will review their AR, no less than quarterly, to identify receivables for discharge. If departments have identified receivables for discharge, departments will file an Application for Discharge from Accountability form, STD. 27, with the SCO, Division of Accounting and Reporting. Applications for Discharge from Accountability of uncollectable amounts of more than $10,000 will be filed separately from applications for amounts of $10,000 or less. The $10,000 amount applies to the total of all amounts owed by the debtor, not to each invoice. The application for discharge shall include:

  1. Statement of the nature of the amount due
  2. Name(s) of the person(s) liable
  3. Estimated cost of collection
  4. Any other fact(s) supporting the request, including offset attempts (See SAM section 8790)
  5. If the discharge from accountability is due to bankruptcy, the supporting documentation must include a copy of the court’s final discharge of the debtor and evidence that the specific department is included in the petition for bankruptcy.
  6. Signature, phone number, printed name, and title of person completing the STD. 27
  7. Signature, printed name, and title of manager authorizing the STD. 27 (Continued)

The individual authorizing the Application for Discharge from Accountability should be at a level at least equivalent to that of manager of the accounting office.

For AR amounts of $500 or less, GC section 12438 authorizes state departments to refrain from collecting the AR provided that:

  1. Attempts to collect these ARs are in accordance with SAM section 8776.6
  2. Departments will discharge only those debts that have been determined uncollectible or it is not cost beneficial to continue pursuing collection
  3. Departments understand the discharge from accountability does not release the debtor from the debt owed to the state

The $500 limitation applies to the total of all amounts owed by the debtor, not to each invoice.

The California State Universities must refer to Education Code section 89750.5 for application limitations.

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