FTC Facts

For Consumers Federal Trade Commission

For The Consumer

www.ftc.gov 1-877-ftc-help

New ID 

Is a Bad 

 IDea 

I

f you have fi led for bankruptcy, you may be 

the target of a credit repair scheme called “fi le 

segregation.” In this scheme, you are promised a 

chance to hide unfavorable credit information by 

establishing a new credit identity. Th at may sound 

perfect, especially if you’re afraid that you won’t 

get any credit as long as bankruptcy appears on 

your credit record. 

Th e problem: “File segregation” is 

illegal. If you use it, you could face fi nes 

or even a prison sentence.

The Pitch: 

A New Credit Identity

If you have fi led 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. Th ese 

companies also make pitches in classifi ed 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 

Identifi cation Number (EIN) from the Internal 

Revenue Service (IRS). Typically, EINs — which 

resemble Social Security numbers — are used by 

businesses to report fi nancial 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. 

Th ey’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: 

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 fi led for bankruptcy or 

successfully completed a bankruptcy repayment 

plan. And, given a new reliable payment record, your 

chances of getting credit will probably increase as 

time passes. 

‘File Segregation’: New ID Is a Bad IDea 

DECEMBER 2005
FTC Facts For Consumers

 For The Consumer Federal Trade Commission

 www.ftc.gov 1-877-ftc-help

 Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education

Th e company or “fi le segregation” program is 

affi liated with the federal government.

Th e federal government does not support or 

work with companies that off er such programs.

Th e “fi le segregation” program is legal.

It is a federal crime to make any false statements 

on a loan or credit application. Th e 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, fi le segregation 

likely would constitute civil fraud under many state 

laws.

Rights Under The Credit 

Repair Organizations Act

Th is 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 off ered. 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. Th e 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. Th e 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 aff airs offi ce 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 fi le a complaint online at 

ftc.gov, or send your complaint to: Consumer 

Response Center, Federal Trade Commission, 

Washington, D.C. 20580.

For More Information

Th e FTC works for the consumer to prevent 

fraudulent, deceptive and unfair business practices 

in the marketplace and to provide information 

to help consumers spot, stop, and avoid them. 

To fi le a complaint or to get free information on 

consumer issues, visit ftc.gov or call toll-free, 

1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-

653-4261. Th e FTC enters Internet, telemarketing, 

identity theft, and other fraud-related complaints 

into Consumer Sentinel, a secure, online database 

available to hundreds of civil and criminal law 

enforcement agencies in the U.S. and abroad.