Moratorium Definition How It Works Examples

Moratorium Definition How It Works Examples

Moratorium: Definition and Examples

What Is a Moratorium?

A moratorium is a temporary suspension of an activity or law until future consideration warrants lifting the suspension, such as resolving the issues that led to the moratorium. It can be imposed by a government, regulators, or a business.

Moratoriums are often imposed in response to temporary financial hardships. 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 debt collection process can be suspended during bankruptcy proceedings.

Key Takeaways

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

How Moratoriums Work

A moratorium is often a response to a short-term crisis that disrupts the normal routine of a business. For instance, in the aftermath of a natural disaster like an earthquake or flood, a government may grant an emergency moratorium on some financial activities, which will be lifted when normal business can commence again.

If a company is experiencing financial difficulties, it can place a moratorium on certain activities to lower costs. The business may institute a hiring freeze, limit discretionary spending, or cut back on company travel and non-essential training. These moratoriums are designed to reduce unnecessary spending and alleviate a financial shortfall or avoid default on debt obligations, without interrupting the business’s ability to repay its debts or meet necessary operational costs. They bring spending back in line with current company revenues.

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In bankruptcy law, a moratorium is a legally binding hiatus in the right to collect debts from an individual. This period protects the debtor while a recovery plan is developed and implemented. This type of moratorium is common in Chapter 13 bankruptcy filings when the debtor seeks to restructure outstanding debts.

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

Examples of Moratoriums

As an 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 unrelated to bank principal or interest payments to reduce risks to the bank’s liquidity.

Insurance companies sometimes issue moratoriums on writing new policies for properties in specific areas during natural disasters. For example, in February 2011, MetLife issued a moratorium on writing new policies in many Texas counties due to an unusual outbreak of wildfires.

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