What is a 'Moratorium'

A moratorium is a period of time when there is a suspension of a specific activity until future events warrant a removal of the suspension, or issues regarding the activity have been resolved. Such action may be imposed by a government, or it may be taken voluntarily by a private business.

BREAKING DOWN 'Moratorium'

Usually taken in times of economic crisis, such as an earthquake or flood, a moratorium provides people with time to stabilize their finances before dealing with potential problems, such as a mortgage default and foreclosure.

Moratoriums are most often enacted in relation to financial hardships. This can include voluntarily imposed conditions set by a business designed to lower costs for a period of time, as well as legally mandated requirements to cease certain financial activities, such as attempts to collect a debt.

Moratoriums and Legal Bankruptcy Proceedings

In bankruptcy law specifically, a moratorium refers to a legally binding halt of the right to collect debt. The placement of a moratorium allows for the individual or entity filing for bankruptcy an opportunity to review current standings, providing protection for the debtor as a plan is created. This form of moratorium is more common in Chapter 13 bankruptcy filings where the debtor is looking to restructure the repayments of any associated debt obligations.

Emergency Moratoriums

A government official may declare a moratorium on certain financial activities in the event of a crisis. This can include protecting consumers in cases where a state of emergency is declared after a natural disaster, or spending changes in response to a financial crisis.

For example, in 2016, the governor of Puerto Rico issued an order to limit the withdrawal of funds from the Government Development Bank. This effectively established a moratorium on all withdrawals that were not related to bank principal or interest payments, lessening the risks associated with the bank's liquidity.

Examples of Voluntary Moratoriums in Business

If a company is experiencing financial difficulties, it can place a moratorium on certain activities to lower costs. The business may limit discretionary spending, or it may cut back on company-provided travel benefits or non-essential training.

Moratoriums of this nature as designed solely to lessen unnecessary spending and do not affect a business's intent to repay debts or manage all necessary operational costs. These steps can be taken to counteract the company's financial hardships without having to default on debt obligations, providing a vehicle to get spending more in line with current company revenues.

RELATED TERMS
  1. Bankruptcy

    A legal proceeding involving a person or business that is unable ...
  2. Voluntary Bankruptcy

    A type of bankruptcy where an insolvent debtor brings the petition ...
  3. Bankruptcy Abuse Prevention And ...

    Legislation enacted by President George W. Bush in 2005 that ...
  4. Suspense Account

    In accounting, the section of a company's books where unclassified ...
  5. Chapter 11

    Named after the U.S. bankruptcy code 11, Chapter 11 is a form ...
  6. 341 Meeting

    The meeting of creditors that occurs when an individual files ...
Related Articles
  1. Taxes

    How To Survive A Bankruptcy Filing

    Learn how to make filing for bankruptcy less painful so you can successfully rebuild your financial life.
  2. Financial Advisor

    Should You File For Bankruptcy?

    Find out how to determine whether this option will help or hurt your financial situation.
  3. Personal Finance

    What You Need To Know About Bankruptcy

    Don't choose this last-resort option until you learn how it will affect your future.
  4. Investing

    A Strong And Noble Driller

    Relative to its future growth potential, Noble shares look incredibly attractive.
  5. Small Business

    Taking Advantage Of Corporate Decline

    A bankrupt company can provide great opportunities for savvy investors.
  6. Small Business

    The 5 Biggest Oil Bankruptcies of All Time (CVX, OGXP3.SA)

    Learn about the five largest bankruptcies in the oil industry. With oil prices in a slump and a global oversupply of oil, more bankruptcies loom on the horizon.
  7. Taxes

    Saving On Bankruptcy Costs

    Going bankrupt is awful enough without worrying about ways to pay for it. Here's how to save on lawyers, filing fees and other inevitable costs.
  8. Insurance

    Top 5 Reasons Why People Go Bankrupt

    The biggest cause of bankruptcy in the United States is medical expenses.
  9. Taxes

    File Chapter 7 Bankruptcy

    Chapter 7 is the "liquidation" form of bankruptcy. When people file for Chapter 7, the trustee may sell some of the filer's assets to pay creditors.
  10. Investing

    Sacrifices Necessary to Keep Puerto Rico Afloat

    After years of band aids and significant borrowing to meet its obligations, the time has come for meaningful reform in Puerto Rico.
RELATED FAQS
  1. What's the difference between a grace period and a moratorium period?

    Find out what grace periods and moratorium periods are, what you have to do to get them and how they can benefit your financial ... Read Answer >>
  2. Can personal loans be included in bankruptcy?

    Read about debts that are dischargeable when filing for bankruptcy. Learn about how personal loans are treated when filing ... Read Answer >>
  3. What effect did the Bankruptcy Abuse Prevention and Consumer Protection Act of 2 ...

    Credit card companies and banks hate deadbeats who take from their bottom lines. They especially dislike the Chapter 7 bankruptcy ... Read Answer >>
Hot Definitions
  1. Trumponomics

    Trumponomics is a term for the economic policies of President-elect Donald Trump.
  2. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  3. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  4. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  5. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
  6. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
Trading Center