File Segregation - Can you create a new credit file?
9 August 2006One of the more dangerous credit repair schemes you can get involved in is something called file segregation. It’s being touted by many unscrupulous credit repair companies as a way to try to boost your credit score by giving you a blank slate. Essentially, what they recommend for you to do is go get an IRS employee identification number and use it to set up a separate line of credit at a different address that will be hard for credit agencies to connect to your old credit history. You’ll segregate the files, causing you to have two different lines of credit - and you just use the good one when you need to borrow. Sounds great!
Wrong! Turns out it’s illegal, and it is a felony under federal law to establish a new identity for this purpose. You could be fined or even go to prison. The Federal Trade Commission has an extensive debunking page on their website here. They describe the scam as commonly looking like this:
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.
I’ve looked around online and seen several companies claiming that if you just listen to them and do it their way, with a tiny loophole, they’ve figured out a way to make file segregation a legal way to repair your credit. Don’t fall for that. It’s not legal, period, and you’re going to get into trouble if you do it. There is no legal way to just delete your old credit and get a new file.
What if you paid a credit repair company already and they want you to use file segregation? You have rights under the Credit Repair Organizations Act. The FTC explains:
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.
This sounds complicated, but the upshot is: call an attorney. Even if you can’t afford one, you might be able to get one for free - because if you’ve got an open and shut case, the attorney will take the fees out of the hide of the credit repair company. If that doesn’t work, report them to the FTC directly.
Discuss this on the Free the Drones Credit Forums here.
One Response to “File Segregation - Can you create a new credit file?”
June 12th, 2007 at 7:34 am
[...] Posts: Free The Drones Personal Finance Blog with an article about creating a NEW credit profile. Is this legal? Can you do this? Read the article to find out. [...]