What Is a Moratorium?
A moratorium is a temporary suspension of an activity or law until circumstances warrant lifting the suspension, often when the underlying issues have been addressed. A moratorium may be enforced by governments, regulatory agencies, or businesses.
Moratoriums are frequently implemented in response to short-term financial struggles. For instance, a company exceeding its budget may implement a moratorium on new hiring until the next fiscal year begins. In legal contexts, a moratorium can halt activities such as debt collection during bankruptcy proceedings.
Key Takeaways
- A moratorium is a temporary cessation of business as usual or a suspension of certain laws or regulations.
- Typically, moratoriums aim to mitigate immediate financial difficulties or provide time to address related issues.
- In bankruptcy law, a moratorium is a mandatorily enforced pause in debt collection from creditors.
How Moratoriums Work
Moratoriums often respond to short-term crises that disrupt regular business routines. For instance, after a natural disaster like an earthquake or flood, an emergency moratorium on certain financial activities might be authorized by the government, to be lifted once normal operations resume.
When a company faces financial challenges, it may enforce a moratorium on specific activities to lower expenses. Such moratoriums might include a hiring freeze, limiting discretionary expenses, or reducing non-essential travel and training. These measures aim to realign spending with current business revenues, avoiding defaults on debt obligations while retaining operational capability.
In the realm of bankruptcy law, a moratorium represents a legally mandated hiatus on creditors’ rights to collect debts from an individual. This protective pause supports the debtor as a recovery plan is formulated and implemented. Common in Chapter 13 bankruptcy cases, this form of moratorium facilitates debt restructuring.
Examples of Moratoriums
In 2016, Puerto Rico’s governor issued an order to limit fund withdrawals from the Government Development Bank. This emergency moratorium restricted withdrawals unrelated to bank principal or interest payments to minimize liquidity risks.
Insurance companies, on a voluntary basis, may enact moratoriums on issuing new policies for properties in disaster-affected areas to manage loss probabilities. For instance, in February 2011, MetLife imposed a moratorium on new policies in various Texas counties due to an unusual outbreak of wildfires.
Related Terms: hiring freeze, default, bankruptcy, liquidity.
