Credit Rebuilding Scams - Total Bankruptcy
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Scams to Avoid when Rebuilding Your Credit

In your haste to rebuild your credit, you may be tempted to try anything that promises to get you back on your feet again after filing for Chapter 7 or 13 bankruptcy. Be very careful! There are many scam artists out there that know your situation, and they will promise you all sorts of ways in which they can magically repair your credit and get you on your feet again after bankruptcy.

The Credit Repair Scam

One particularly notorious scam involves the so-called 'credit repair' industry. You've probably heard the come-ons before: "Erase Bad Credit" and "Clean Up Your Credit History." These are the pitches of scam artists intent on separating you from your hard earned cash. Indeed, the Federal Trade Commission has gone so far as to claim that it "has never seen a legitimate credit repair company."

Remember that your credit history cannot be repaired, fixed, fine-tuned, or in any way changed from the truth. It is what it is. Of course, if there is a mistake on your credit report, under the Fair Credit Reporting Act the credit agency must fix your credit report to make it accurate. This is the only type of legitimate credit 'repair' available to you. Any other promise is a scam.

There are many types of credit repair scams. The most common scam involves the credit repair company's promise to give you a new credit identity. In this scam, the credit repair company will send you a letter warning you that because of your bankruptcy, you won't be able to get any new credit for 10 years (which is completely untrue). Once the company gets your attention with this false claim, it then promises to help you hide your bankruptcy and establish a new credit identity that will supposedly allow you to get new credit.

Typically, the company will require you to pay an upfront fee for its service and then it will direct you to apply for an Employer Identification Number (EIN) from the IRS. An EIN is simply the business equivalent of a social security number, and anyone with a business can obtain an EIN by applying for one online with the IRS. But EINs are strictly for businesses and are not substitutes for social security numbers.

After you receive your EIN, the company will most likely advise you to use this number instead of your social security number when you apply for new credit, and to use a new mailing address. This is pure fraud. If you are caught engaging in this scam, you could be subject to fines and even imprisonment. It is a federal crime to make any false statements on a loan or credit application, to misrepresent your Social Security number, or to obtain an EIN from the IRS under false pretenses. And if you use the mail to further this scheme, you could be charged with mail fraud as well, in addition to any liability you may be subject to under state civil fraud laws.

Of course, more sophisticated credit repair scam artists will not be quite as blatant. But always be skeptical, and remember that if an offer sounds too good to be true, it's probably some type of scam. Any time you have questions, remember you have rights. In fact, Congress was so concerned about the credit repair industry that it passed a special law on this issue, the Credit Repair Organizations Act.

The Act prohibits companies from making false claims about credit repair and makes it illegal for these businesses to charge you until they have performed their services. Credit repair organizations must advise you in writing what they will do for you, give you an estimate of how long it will take to complete their work for you, provide a list of all charges, and describe any guarantees. Also, any contract you sign must advise you that you have three days to cancel at no charge.

Responding to Repair Scams

If a credit repair company has broken the law in any way, you have a wide range of remedies available to you. You may file suit in federal court, obtain your actual damages, punitive damages, and even your attorney's fees should you prevail. In addition to federal law, many states have their own set of credit repair laws. To find out about your state's laws, you should contact your state attorney general or secretary of state's office. Also, there are many private lawyers that specialize in consumer credit litigation, and most reputable attorneys will provide you with an initial consultation about your case.

You should also contact the FTC. Although it does not take action on behalf of individual consumers, it will take administrative action against companies that have committed widespread violations of the law, and it will seek to recover damages on behalf of large groups of consumers. You can send your complaint to: Consumer Response Center, Federal Trade Commission, Washington, D.C. 20580.

The Secured Credit Card Scam

This is also a popular scam. First, a little background. Most credit cards are unsecured. This means that if you default on your credit card, the credit card company can sue you for what you owe them, but your assets (such as your car or home) can't be seized by your creditor to satisfy your debt. Instead, the credit card company will have to institute legal proceedings against you to recover what you owe.

By contrast, a secured credit card requires you to establish a savings account to 'secure' your new credit. In other words, you have to give your own hard earned money to a bank to be given the 'privilege' of having them issue you a credit card. Now that the bank has your money securing your debt, if you default, the bank doesn't have to go through legal proceedings against you; all it has to do is suck the money right out of your savings account. Additionally, the fees and interest rates on secured credit cards are typically significantly higher than those for unsecured cards. Also, you'll typically pay application and processing fees just to establish the account-fees you'll almost never pay when you obtain an unsecured card.

And if you later file bankruptcy with a secured credit card, the debt is not discharged. In other words, with a secured credit card, the only winner is the bank; you're the big loser.

Credit Repair Warning Signs

When you hear the following pitches from a credit repair company, you are most likely being targeted for a credit repair scam:

  • The company requires you to pay for its services before it actually provides them;
  • The company does not advise you of your legal rights and that there are many opportunities for you to help yourself free of charge;
  • The company urges you not to contact a credit bureau directly; or
  • The company advises you to dispute all information in your credit report or take any other action that seems illegal.

Indeed, the best credit repair you can do is self-help-using the new approach to saving and spending we discuss throughout our website.

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