Credit File Segregation, Legitimate or Not?

If you have filed for bankruptcy, you may be the target of a credit repair scam called “file segregation.” In this scam 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, Employer Identification Numbers — which resemble Social Security numbers — are used by businesses to report financial information to the Internal Revenue Service (IRS) and the Social Security Administration. After you receive your Employer Identification Number, 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.

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. 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 ten years (the period of time bankruptcy information may stay on your credit record).

The truth: 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 or successfully completed a bankruptcy repayment plan.  With 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 truth: The federal government does not support or work with companies that offer such programs.

Claim 3: The “file segregation” program is legal.

The truth: It is a federal crime to make any false statements on a loan or credit application, to misrepresent your Social Security number or to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.

Your 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 in a written contract that also spells out the following:  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.

Don’t fall for this scheme, it is illegal. If you’ve had a problem with a credit repair company, report them by contacting your local consumer affairs office or your state attorney general. Many attorney generals have toll-free consumer hotline; check with your local directory assistance.

Credit Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

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