What is a Moratorium
A moratorium is a temporary suspension of an activity or a law until future events warrant lifting the suspension or issues regarding the activity have been resolved. A moratorium may be imposed by a government or by a business.
Moratoriums are often enacted in response to financial hardships. Financial moratoriums can include voluntarily imposed conditions set by a business designed to lower costs for a period. They may also be as well as legally mandated requirements to cease specific financial activities, such as attempts to collect a debt.
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.
In bankruptcy law, a moratorium refers to a legally binding halt of the right to collect a debt. The placement of a moratorium allows the individual or entity filing for bankruptcy an opportunity to review current standings. This time-out protects the debtor during the creation of a plan for recovery. A moratorium of this type is typical 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 emergency moratorium established a hold on all withdrawals that were not related to bank principal or interest payments, thereby 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 and non-essential training.
Moratoriums of this nature, designed solely to lessen unnecessary spending, do not affect a business's intent to repay debts or manage all necessary operational costs. These steps may be taken to counteract the company's financial hardships without the need to default on debt obligations. This voluntary moratorium provides a vehicle to get spending in line with current company revenues.
Many insurance companies issue moratoriums for specific areas when natural disasters or uprisings occur. 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 uncontrolled wildfires. In 2014, many insurance companies issued moratoriums on writing new policies in Ferguson, MO, and surrounding areas due to rioting resulting from a controversial verdict.