File Segregation Scam

If you have filed for bankruptcy or have bad credit generally, you could be the target of a fraud the Federal Trade Commission (FTC) calls “file segregation”. In this scheme, you are promised a chance to hide unfavorable credit information by establishing a new credit id. That may sound perfect for your circumstance, except that "file segregation" is illegal and you could face fines or even a prison sentence.

It often starts out as an innocent ad from a credit repair company promising to eliminate all negative remarks on your credit file including a bankruptcy and establish a new credit file to use when you apply for credit. If you sign up for the service (which you pay for), 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. The following false claims from the Federal Trade Commission, along with the pitch for getting a new credit identity, should alert you to the possibility of fraud:
1. You can’t get credit for 10 years after bankruptcy - Each creditor has its own criteria for granting credit. Some will decline for years after a bankruptcy. Some will not. And, given a new reliable payment record, your chances of getting credit will probably increase as time passes.
2. The "file segregation" program is affiliated with the federal government - The federal government does not support or work with companies that offer such programs.
3. The "file segregation" program is legal - Per FTC, "it is a federal crime to make any false statements on a loan or credit application…. 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.”

The law not only prohibits false claims about credit repair but it also makes it illegal for these operations to charge you until they have performed their services. It requires these companies 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, which are sums of money to punish the company for violating the law.

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. You can call FTC toll free at 1-877-FTC-HELP (1-877-382-4357).

Debt Elimination Scams

According to some false advertising, for a fee you can get a certificate to eliminate debt? Recently I was asked to add a debt elimination web link described to me as "a new alternative to many of the debt programs out there." First of all this form of "debt elimination" is not new at all. Debt elimination fraud has been around for a very long time. But I replied back to the web owner:

"Sorry but I won't be able to support your debt elimination site. I have found your method of debt elimination morally and ethically questionable as well as legally borderline. In fact you may want to ask the FBI for a stamp of approval with statements on your site such as: 'By lending you credit and charging you interest, the banks are actually committing fraud.’ But it doesn't stop there. By mailing, you an invoice and demanding payment, they are now committing Mail Fraud as well."

Here is what others have to say on the subject of debt elimination systems such as the above:

Money Central Offers The Basic Plan - Money Central at has a great article on debt elimination scams called, Watch Out For Debt Elimination Scams. Among other points made is the basic plan of such programs:

"Here’s how it works: For a stiff up-front fee -- sometimes $2,500 or more -- you can get a certificate to take to your bank that supposedly eliminates your obligation to repay your mortgage, credit cards or other debt. What the victims get, of course, is an entirely bogus document that starts them down the road to trashed credit, foreclosure, financial ruin and possible federal fraud charges."

From Yours Truly - I have a question concerning an organization claiming to be able to eliminate debt and especially credit card debt without payment of the debt. Credit is a fact of life to the tune of trillions per year. So if all these transactions are illegal (according to these web sites) how come they still exist? How come the courts have not shut down such "illegal" practices? Suggest Damages Being Done - Bank offers the following:

"These schemes are proliferating on the Internet, and the organizers are charging borrowers substantial up-front fees and commissions based on the total amount of debt that can be forgiven. Members of the public are being harmed as borrowers generally pay significant amounts of money without eliminating or reducing their overall debt obligations - which of course is not in fact possible through any of these programs."

Federal Reserve Board Office of the Comptroller of the Currency Says:

"Please be advised that worthless instruments entitled 'Bond for Discharge of Debt', 'Bill of Exchange,' 'Due Bill,' 'Redemption Certificate,' or other similarly titled documents continue to be presented to financial institutions, mortgage companies, credit card issuers, and retail establishments throughout the United States in an effort to eliminate legitimate debts. Many of these schemes are premised on baseless or fraudulent claims against the United States Treasury, the Secretary of the Treasury, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Internal Revenue Service, or other federal or state agencies... Regardless of how such instruments or documents are titled or whether they appear authentic, they are worthless, have no legal validity, and are not payable through the United States Treasury, the Secretary of the Treasury, the Comptroller of the Currency, or any other federal or state agency."

What To Do If Approached

If you have a debt: 1.)pay it; 2.)negotiate it; 3.) or declare it in bankruptcy. But don't fall into the trap of believing that somehow the debt is illegal because someone offers some form of legal hocus pocus. Additionally, if you come across debt elimination scams on the Internet or elsewhere, consider reporting the details to the FBI by calling the regional office listed in your phone book.

Readers will probably be interested to know Mike, the author of this article, also offers a free debt elimination mini-course via e-mail. You can enroll at Debt Free In 7.5 Years.

Author's Bio: 

Mike has been an Internet Guide/Writer in the field of Credit/Debt Management for over 10 years. His site was awarded Best Of Net by Forbes Publication from 2000 to 2005 with site visitation doubling to over 500,000 average views per month in the last year.

He has also offered debt elimination seminars to businesses and community colleges for the last 9 years, and has written for several publications, and has been interviewed on the radio a number of times.