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.

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