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.
At HOMELOAN Source, we can review your legal and legitimate options for
managing your financial affairs. We hope that you can talk to us
first.
