Moratorium

The delay or temporary deferral of a law or an activity

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Written by CFI Team

What is a Moratorium?

A moratorium refers to the delay or temporary deferral of a law or an activity. It can be enforced by either a business or a government.

Moratorium

A moratorium continues to be in force until the issues causing its enforcement are solved. Moratoriums can also be imposed to delay debt payments under qualified circumstances, which makes the lenders incapable of paying off their debts. The process is called a debt moratorium.

In legal terms, a moratorium can refer to a temporary postponement of a law to allow the resolution of a lawful opposition.

Moratoriums are usually authorized when normal routines are interrupted by a crisis. For example, federal and state governments may grant moratoriums on several financial activities immediately after a natural calamity or a disaster. The governments may lift the restrictions once business returns to normal.

Summary

A moratorium refers to a delay or short-term suspension of a law or an activity until the underlying issue is solved. It is usually enacted by a business or a government.
It is generally imposed following a crisis that causes financial pressure or disturbs normal routines.
A moratorium can also refer to an authorized delay in the enactment of a law to allow the resolution of a legal opposition.

Moratorium Examples

1. Conservation authorities and endangered species

Conservation authorities and animal rights activists may request various moratoriums to safeguard endangered flora or fauna species. These suspensions prevent the hunting or poaching of endangered species.

For example, on July 2, 1992, the Canadian government enforced a cod moratorium in response to the depletion of cod stocks. It is still in force except for a small business-related fishery allowed in Labrador and Newfoundland’s waters.

2. Companies facing financial troubles

Companies going through financial problems impose a moratorium on some activities to reduce costs. A company may impose a hiring freeze if it exceeds the budget for the current fiscal year.

Thus, a moratorium enacted to reduce unnecessary costs does not prevent the business from paying off the debts or meeting operational expenses. The move is initiated to ease financial pressure and prevent the need to default on the debt obligations.

3. Insurance companies on new policies

A moratorium is also enacted by insurance companies for new policies on certain properties amid a natural calamity. The delays help to reduce losses when there is an unusually high probability of claims.

Insurance companies also impose a moratorium on payments of insurance premiums. For example, when the coronavirus pandemic hit the economy, insurance companies started to extend payment relief to policyholders by allowing them to delay paying premiums on life, property, and auto insurances.

Moreover, insurance companies impose a moratorium on the cancellation of policies and non-renewals to prevent the lapse of coverage in the event of non-payment of premiums.

4. Loans

A moratorium is imposed on payments of educational loans and mortgages where loan repayments are not required for a certain period.

In the case of an educational loan, loan payments are required once the student graduates. For home loans, the bank can allow property buyers to delay the monthly loan repayments if the construction is delayed.

5. Government

A government declares moratorium for a variety of reasons. It may impose a moratorium on issuing permits on the construction of buildings to control the development of the property.

6. Banks on debt payments

The central bank of a country may impose a moratorium on monthly debt payments during times of crisis, such as war and natural disasters. However, interest will still accrue on the balance loan amount during the moratorium period.

After the moratorium is lifted, the interest accrued will be added to the principal amount, thus increasing the total loan amount. In addition, the tenure of the loan will be extended, and borrowers will need to pay interest for that additional period.

As per the bankruptcy filing rule, a moratorium is a legal suspension in the right to collect debts from the concerned individual or business. The period of delay protects the borrowers, and, in the meantime, a recovery plan is created and agreed upon. During the period, the debtor restructures the payments of the remaining debts.

Additional Resources

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below: