If you have filed for bankruptcy or have had credit problems in the past, you may be the target of credit repair schemes, often called file segregation. In these schemes you are promised a chance to hide unfavorable credit information by establishing a new credit identity. This sounds good for those who may fear that they would not be given credit as long as a bankruptcy or delinquent or late payments still appear on their credit records. The problem is, file segregation is illegal and those using it could face heavy fines or even imprisonment.

The pitch
If you have filed bankruptcy or have had credit problems, you may receive a letter from a credit repair company that warns you about your inability to get credit cards, personal loans, home mortgages, or other types of credit for 10 years. For a fee, the company promises to help you hide your bankruptcy and detrimental credit history and establish a new credit identity you can use when applying 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, you are advised to use it in place of your Social Security number when you apply for credit. You also are usually advised to use a new mailing address and to include some credit references.

The catch
The following are some reasons a credit repair service might give you for establishing a new credit identity. These should alert you of a possible fraud, so be cautious.

1. You will not be able to get credit for 10 years (the period of time bankruptcy information may stay on your record). Each creditor has its own criteria for granting credit. Although one may reject your application because of past credit problems, another may grant you credit in spite of bankruptcy or a detrimental credit history. With a consistent and dependable payment record over a period of time, your chances of obtaining credit will probably increase.
   
2. The company or file segregation program is affiliated with the federal government. The federal government has never supported, been associated or affiliated with, or worked in cooperation with any companies, organizations, or individuals offering such programs.
   
3. The file segregation program is legal. It is a federal crime to make any false statements on a loan or credit application, which the credit repair company might advise you to do. 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. Also, file segregation would most likely constitute civil fraud in most states.

Conclusion
If you receive a letter from a company making credit repair promises, contact your state attorney general or consumer protection office. You also can file a complaint with the Federal Trade Commission. Write to the Correspondence Branch, Federal Trade Commission, Washington, DC 20580. Although the Federal Trade Commission doesn't handle individual cases, it can act against companies when it sees a pattern of possible law violations developing.

The primary source of information for this article was two brochures published and distributed by the Federal Trade Commission: “Credit Repair Scams” and “A New Credit Identity.” To obtain copies of each write to Public Reference, Federal Trade Commission, Washington, DC 20580.