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 are 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.
Beware of the Pitch
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.
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.
To convince you to establish a new credit identity, the credit repair service is likely to make a variety of false claims.
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).
Fact: 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.
Fact: The federal government does not support or work with companies that offer such programs.
Claim 3: The "file segregation" program is legal.
Fact: 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
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.