What Is a Moratorium?

A moratorium is a temporary suspension of an activity or a law until future events warrant lifting the suspension or related issues have been resolved. A moratorium may be imposed by a government or by a business.

Moratoriums are often enacted in response to temporary financial hardships. (Both "moratoriums" and "moratoria" are acceptable as plural forms of the word moratorium.) For example, a business that has exceeded its budget might place a moratorium on new hiring until the start of its next fiscal year.

In legal proceedings, a moratorium can be imposed on an activity such as a debt collection process. The moratorium will be lifted when a related issue is resolved.

How Moratoriums Work

A moratorium is often, though not always, a response to a crisis that disrupts normal routines. In the immediate aftermath of an earthquake or flood, an emergency moratorium on some financial activities may be granted by a government. It will be lifted when normal business can commence.

Key Takeaways

  • A moratorium is a temporary suspension of business as usual.
  • Most of the time, moratoriums are intended to alleviate temporary financial hardship or provide time to resolve related issues.
  • In bankruptcy law, a moratorium is a legally-mandated hiatus in debt collection.

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

In bankruptcy law, a moratorium is a legally binding hiatus in the right to collect debts from an individual. This time-out period protects the debtor while a plan for recovery is agreed upon and put in place. This type of moratorium is typical in Chapter 13 bankruptcy filings in which the debtor seeks to restructure payments of outstanding debts.

Both "moratoriums" and "moratoria" are acceptable plurals of the term moratorium.

Examples of Moratoriums

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 cut back on company travel and non-essential training.

Moratoriums of this nature, designed solely to reduce unnecessary spending, do not affect a business's intent to repay its debts or to meet all necessary operational costs. They are taken to alleviate a financial shortfall without the need to default on debt obligations. The voluntary moratorium is a vehicle to bring spending back in line with current company revenues.

Insurance companies often issue moratoriums on new policies for properties in specific areas during the course of a natural disaster. Such moratoriums help mitigate losses when the probability of filed claims is abnormally high. For example, in February 2011, MetLife issued a moratorium on writing new policies in many Texas counties due to an outbreak of wildfires.