What is '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.
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.