Upfront Fee

Upfront fee summary:

• An upfront fee is a full or partial charge for goods or services that you pay before you get the goods or services.

• Federal law prohibits debt relief companies from charging upfront settlement fees before a debt has been resolved.

• A debt isn’t considered resolved until a customer agrees to a settlement offer and makes payment.

Upfront fee definition and meaning

Upfront fee means a charge that customers pay before a company will perform its services or deliver its product. Upfront fees can be full or partial. They can also be refundable or nonrefundable. 

Federal law prohibits upfront fees for debt relief services. Reputable companies don't charge them.

Key concept: An upfront fee is a full or partial charge that a company requires before performing services or delivering goods. 

More about upfront fees

In some industries, it's common for companies to charge customers upfront before doing work or providing goods. Often, the purpose of upfront fees is to cover costs the provider incurs at the beginning of a transaction. 

A mortgage lender might charge an application fee to pay for credit reports and title searches. If the borrower isn't approved for financing or chooses not to move forward, the lender will be compensated for those initial costs.

Likewise, a kitchen contractor might require that you pay 50% of the cost of your cabinets upfront when you place the order. Your funds help them buy materials and pay their staff to make your cabinets.

Debt relief companies provide debt consulting services and debt negotiation services, and they incur costs before any debts are enrolled or resolved. However, the Federal Trade Commission's Telemarketing Sales Rule doesn’t allow them to charge upfront fees. Before you’re charged, the company has to successfully negotiate a debt on your behalf. If a debt relief company tries to charge upfront settlement fees, that’s a big red flag.

The rules about upfront fees and debt relief providers

You probably noticed that the rule isn't called a debt relief law. It's a telemarketing sales rule that applies to several types of financial product and service providers. It applies to any debt relief service provider that uses interstate telephone services to sign up clients. Those providers could be debt management or credit counseling companies, debt relief companies, attorneys, or others. 

The rule doesn’t apply to nonprofits or to providers who meet face-to-face with customers before signing them up. 

The rule says that debt settlement fees can’t be collected until all of these conditions are met:

• The debt relief service successfully settles or changes the terms of at least one of the customer’s debts.

• The customer agrees to the debt relief arrangement with the creditor holding the debt.

• The customer makes at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

The rules also say that the provider can’t front-load their fees just because a consumer has enrolled multiple debts in its program. The fees on each debt follow the same rules.

Debt relief savings accounts and fees

Most debt relief firms require that you deposit money for settlements and fees into a dedicated account. This is a bank account in your name, that you control. It’s for building up funds to offer your creditors. You give the debt relief company permission to access the account for the purpose of resolving your debts.

The bank where the account is set up might charge setup or monthly fees. These fees go to the banks, not the debt relief providers. 

For a debt relief company to require a dedicated account, five things must be true:

1. The account must be with an insured financial institution.

2. The customer owns the funds and any interest earned.

3. The customer can cancel the debt relief service at any time without penalty. The money in the account—all unearned provider fees and savings—must be returned within seven business days.

4. The debt relief provider can't own or control or have any affiliation with the financial institution that maintains the account.

5. The debt relief company and financial institution can't pay each other referral fees.