# Understanding Moratoriums: Temporary Legal Suspensions Explained

![Moratorium: A temporary suspension of an activity or law.](https://www.investopedia.com/thmb/-zCeN3cEc6vNMS5OcFPBdwPegaQ=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/moratorium.asp-final-78226f14c6b54058a908853e801e8584.png)

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## What Is a Moratorium?

A moratorium temporarily suspends activities or laws, often during financial or legal hardships, to provide time for resolution. Imposed by governments or businesses, they help manage crises by halting normal operations until the underlying issues are resolved.

### Key Takeaways

*   A moratorium is a temporary suspension of activities or laws, often used to address financial or legal issues.
*   Governments, regulators, or businesses can impose moratoriums to manage short-term crises or financial difficulties.
*   Moratoriums in bankruptcy law provide debtors protection against creditors while formulating recovery plans.
*   Businesses experiencing financial challenges may use moratoriums to control costs and realign spending with revenues.
*   Moratoriums can help preserve resources, like liquidity for banks or reduced risk exposure for insurance companies during natural disasters.

## Understanding the Functionality of Moratoriums

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.

When a company faces financial difficulties, it may impose a moratorium on certain activities to cut costs. The business might implement a [hiring freeze](https://www.investopedia.com/terms/h/hiring-freeze.asp), reduce discretionary spending, or limit travel and nonessential training.

These moratoriums aim to cut unnecessary spending without affecting a business's ability to repay debts or cover essential costs. They are instead taken to alleviate a financial shortfall or avoid [default](https://www.investopedia.com/terms/d/default2.asp) on debt obligations. The voluntary moratorium is a vehicle to bring spending back in line with current company [revenues](https://www.investopedia.com/terms/r/revenue.asp).

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](https://www.investopedia.com/terms/d/debtor.asp) while a recovery plan is agreed upon and put in place. This type of moratorium is common in [Chapter 13 bankruptcy](https://www.investopedia.com/terms/c/chapter13.asp), where the debtor aims to restructure debt payments.

> **Fast Fact**
>
> Both “moratoriums” and “moratoria” are acceptable plurals of the term “moratorium.”

## Real-World Instances of Moratorium Applications

For example, in 2016, Puerto Rico's governor ordered limits on withdrawals from the Government Development Bank. This emergency moratorium restricted withdrawals unrelated to [principal](https://www.investopedia.com/terms/p/principal.asp) or [interest](https://www.investopedia.com/terms/i/interest.asp) to protect the bank's [liquidity](https://www.investopedia.com/terms/l/liquidity.asp). 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. These moratoriums help reduce losses when claim filings are unusually high. In February 2024, the Texas FAIR Plan Association temporarily stopped writing new policies in many Texas Panhandle counties because 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

A moratorium serves as a temporary halt to regular business operations, laws, or regulations during a crisis or financial hardship. It allows businesses, governments, or regulators to address short-term challenges and reassess conditions before resuming normal activities.

Moratoriums can help companies manage financial difficulties without defaulting on debt obligations, and they often provide legal protection during bankruptcy proceedings. Understanding the implications and opportunities a moratorium presents equips stakeholders to make better-informed financial decisions.

> **Article Sources**
>
> 1.  Reuters. “[Puerto Rico Board Approves Liquidation of Government Development Bank](https://www.reuters.com/article/idUSKBN1A0013/).”
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> 2.  Policygenius. “[What Is a Moratorium in Home Insurance?](https://www.policygenius.com/homeowners-insurance/insurance-moratorium/)”
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> 3.  Texas FAIR Plan Association. “[Policy Moratorium in Effect in the Texas Panhandle](https://www.texasfairplan.org/news-and-announcements/policy-moratorium-in-effect-in-the-texas-panhandle/).”