What Is a Moratorium?
A moratorium is a temporary suspension of an activity or law until future consideration warrants lifting the suspension, such as if and when the issues that led to the moratorium have been resolved. A moratorium may 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 moratorium can be imposed on an activity such as a debt collection process during bankruptcy proceedings.
Key Takeaways
- A moratorium is a temporary halt of business as usual, or a suspension of some 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, though not always, a response to a short-term crisis that disrupts the normal routine of a business. For instance, in the immediate aftermath of a natural disaster like an earthquake or flood, an emergency moratorium on some financial activities may be granted by a government. It will subsequently be lifted when normal business can resume.
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 nonessential training.
Moratoriums of this nature are designed solely to reduce unnecessary spending, and are not meant to interrupt a business’s ability or intent to repay its debts or to meet all necessary operational costs. They are instead taken to alleviate a financial shortfall or avoid default on debt obligations. The voluntary moratorium is a vehicle to bring spending back in line with current company revenues.
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 recovery plan is agreed upon and put in place. This type of moratorium is typical in Chapter 13 bankruptcyfilings 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
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 that were not related to bank principal or interest payments, in order to reduce risks to the bank’s liquidity. A liquidation plan for the bank was approved in 2017.
On the voluntary side, insurance companies will sometimes issue moratoriums on writing new policies for properties located in specific areas during the course of a natural disaster.Such moratoriums can help mitigate losses when the probability of filed claims is abnormally high.For example, in February 2024, the Texas FAIR Plan Association issued a moratorium on writing new policies in many Texas Panhandle counties due to an outbreak of wildfires.
When Is a Moratorium Imposed?
A moratorium is frequently, but not always, a response to a short-term crisis that disrupts a business’s normal routine.
How Does a Moratorium Help a Company?
A company that is experiencing financial difficulties can place a moratorium on certain activities to lower costs. The business may trim company travel and nonessential training, limit discretionary spending, or enact a hiring freeze.
What Is a Moratorium in Bankruptcy Law?
A moratorium in bankruptcy law is a legally binding pause in collecting debts from an individual. This hiatus protects the debtor while a recovery plan is agreed upon and put in place.
The Bottom Line
When an activity or law is temporarily suspended until future consideration warrants lifting the suspension, that's a moratorium. A government, regulators, or a business may impose a moratorium until the issues that led to the moratorium have been resolved.
