'File Segregation': New ID Is
a Bad IDea
If you have filed for bankruptcy,
you may be the target of a credit repair scheme called
"file segregation." In this scheme, you are
promised a chance to hide unfavorable credit information
by establishing a new credit identity. That may sound
perfect, especially if you’re afraid that you
won’t get any credit as long as bankruptcy appears
on your credit record.
The problem: "File segregation"
is illegal. If you use it, you could face fines or even
a prison sentence.
The Pitch:
A New Credit Identity
If you have filed for bankruptcy, you may receive a
letter from a credit repair company that warns you about
your inability to get credit cards, personal loans,
or any other types of credit for 10 years. For a fee,
the company promises to help you hide your bankruptcy
and establish a new credit identity to use when you
apply for credit. These companies also make pitches
in classified ads, on radio and TV, and even over the
Internet.
If you pay the fee and sign up for
the service, you may be directed to apply for an Employer
Identification Number (EIN) from the Internal Revenue
Service (IRS). Typically, EINs — which resemble
Social Security numbers — are used by businesses
to report financial information to the IRS and the Social
Security Administration.
After you receive your EIN, the credit
repair service will tell you to use it in place of your
Social Security number when you apply for credit. They’ll
also tell you to use a new mailing address and some
credit references.
The Catch:
False Claims
To convince you to establish a new credit identity,
the credit repair service is likely to make a variety
of false claims. Listen carefully; these false claims,
along with the pitch for getting a new credit identity,
should alert you to the possibility of fraud. You’ll
probably hear:
Claim 1: You will not be able
to get credit for 10 years (the period of time bankruptcy
information may stay on your credit record).
Each creditor has its own criteria for granting credit.
While one may reject your application because of a bankruptcy,
another may grant you credit shortly after you filed
for bankruptcy. And, given a new reliable payment record,
your chances of getting credit will probably increase
as time passes.
Claim 2: The company or "file
segregation" program is affiliated with the federal
government.
The federal government does not support or work with
companies that offer such programs.
Claim 3: The "file segregation"
program is legal.
It is a federal crime to make any false statements on
a loan or credit application. The credit repair company
may advise you to do just that. It is a federal crime
to misrepresent your Social Security number. It also
is a federal crime to obtain an EIN from the IRS under
false pretenses. Further, you could be charged with
mail or wire fraud if you use the mail or the telephone
to apply for credit and provide false information. Worse
yet, file segregation likely would constitute civil
fraud under many state laws.
Rights Under
The Credit Repair Organizations Act
This law prohibits false claims about credit repair
and makes it illegal for these operations to charge
you until they have performed their services. It requires
these companies to tell you about your legal rights.
Credit repair companies must provide this in a written
contract that also spells out just what services are
to be performed, how long it will take to achieve results,
the total cost, and any guarantees that are offered.
Under the law, these contracts also must explain that
consumers have three days to cancel at no charge.
Under the law, you also have the right
to sue in federal court. The law allows you to seek
either your actual losses or the amount you paid the
company — whichever is more. You also can seek
"punitive" damages: sums of money to punish
the company for violating the law. The law also allows
class actions in federal court: cases where groups of
consumers join together in one lawsuit. If you win,
the other side has to pay your attorney’s fees.
Many states have laws regulating credit
repair companies, and may be helpful if you’ve
lost money to credit repair scams.
If you’ve had a problem with
a credit repair company, report the company. Contact
your local consumer affairs office or your state attorney
general (AG). Many AGs have toll-free consumer hotlines.
Check with your local directory assistance.
You also may wish to contact the FTC.
Although the Commission cannot resolve individual credit
problems for consumers, it can act against a company
if it sees a pattern of possible law violations. If
you believe a company has engaged in credit fraud, you
can file a complaint online, or send your complaint
to: Consumer Response Center, Federal Trade Commission,
Washington, D.C. 20580.
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