New ID Is a
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
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
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
The Catch: False
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
Claim 1: You will not be able to get credit for 10 years
(the period of time bankruptcy information may stay on your credit
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.
government does not support or work with companies that offer such
Claim 3: The "file segregation" program is
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
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
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.