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. Bankruptcy Abuse Prevention And ...

    Legislation enacted by President George W. Bush in 2005 that ...
  3. 341 Meeting

    The meeting of creditors that occurs when an individual files ...
  4. Chapter 7

    A bankruptcy proceeding in which a company stops all operations ...
  5. Suspense Account

    In accounting, the section of a company's books where unclassified ...
  6. Chapter 13

    A U.S. bankruptcy proceeding in which the debtor undertakes a ...
Related Articles
  1. Taxes

    When To Declare Bankruptcy

    When is bankruptcy the best or only route– and when is it better to look at alternative solutions? And should you always hire a lawyer?
  2. Taxes

    How To Survive Bankruptcy

    Bankruptcy is not the end of the world. You can survive it and come out on the other side more financially solid.
  3. Taxes

    How To Survive A Bankruptcy Filing

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

    Should You File For Bankruptcy?

    Find out how to determine whether this option will help or hurt your financial situation.
  5. 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.
  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. Investing

    5 Energy Companies Crushed by Low Oil in 2016

    Oil companies globally are at risk of slipping into bankruptcy, and many of these businesses could disappear, leaving the sector worse off than in 2008.
  9. Insurance

    Top 5 Reasons Why People Go Bankrupt

    The biggest cause of bankruptcy in the United States is medical expenses.
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. 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 >>
  3. What are the differences between Chapter 7 and Chapter 13 bankruptcy?

    Read about some of the primary differences between a Chapter 7 and Chapter 13 bankruptcy, including who may be ineligible ... Read Answer >>
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center