Moratorium

Published on :

21 Aug, 2024

Blog Author :

Edited by :

Reviewed by :

A moratorium is an act of postponement or delay in an activity or legal obligation. It is useful in emergencies or as a pre-emptive to avoid crisis-like situations. Thus, governments, businesses, banks, or corporate authorities use moratoriums to protect individuals, the environment, firms, or financial institutions from exigencies.

A moratorium period defines a delay in an activity when an unforeseen situation arises. Such a period remains in force until the conditions return to normal times. For example, in bankruptcy law, a loan moratorium allows debtors to suspend the legal obligation of repayment of loans. As it allows debtors to restructure the loan repayments, post any calamity.

Moratorium Definition

Moratorium refers to deferring an activity to a later date due to a certain unforeseen situation.
It is useful as a policy measure in natural calamities, health emergencies, or acts of god situations arise. It aims to help the general public by postponing or suspending laws or legal obligations.
Moratorium in bankruptcy laws allows for deferred payment options in loan repayment, rent, eviction, or foreclosure cases.
The possibility of deferred payments allows a debtor to restructure loans and gives them extra time to make repayments without losing their collateral asset.

Moratorium Explained

A moratorium is a situation that may halt an act, law, or legal mandate due to an unexpected situation. For instance, such situations can occur due to natural calamities, health emergencies, or an act of god. Businesses or governments sanction moratoriums to excuse individuals, small businesses, or themselves from undertaking certain activities or implementing laws and policies.

Additionally, governments may sometimes use a moratorium period to prevent the implementation of some laws and regulations that face opposition from the public or polity. Through this act, they tend to reconsider the clauses and understand the public demand. Hence, it helps to avert any major public unrest or crisis by pulling back any such legal mandate.

Similarly, there are various types of moratoriums that are useful for the general public. For instance, a rent moratorium may help a family or business postpone the rent payment to the property owner for a few months by declaring a force majeure. An entity may do so due to a crunch of cash flow constraints due to job loss or poor business activity and income generation.

A foreclosure is when a lender takes possession of the debtor’s property, who mortgaged the same property for a loan. It may happen when a mortgagor may fail to make a repayment of an installment or entire loan principal amount and interest. Thus, the mortgagor may request a moratorium foreclosure from the lender to defer repayment until the situation normalizes or request a restructuring of the loan repayment.

Although a moratorium period gives borrowers or debtors extra time to make repayments, it also attracts an additional charge which later adds to the principal amount. This additional amount incentivizes lenders to defer the repayments of loans.

Examples

Let us look at a few moratorium examples in mitigating crises or emergencies:

Example #1

Suppose a state government plans to preserve and protect a river body from being polluted further. It plans to do so by putting a yearly moratorium on public visits. Even though the river body is a famous tourist destination that generates revenues for locals all year round, the state government goes ahead.

However, considering the long-term implications of increasing pollution around the water body, the government introduces certain restrictions. As a result, it leads to the postponement of tourism activities in and around that river body. But on the other hand, it will allow the government to plan a cleanliness drive and rejuvenate the river body.

Example #2

In the context of the COVID-19 pandemic, the United States Centre for Disease Control (CDC) introduced an eviction moratorium. It was because the Americans struggled to make rent payments amidst a spike in unemployment rates. Thus, the CDC declared an eviction moratorium that aimed to block landlords from expelling their tenants earning less than $99,000 a year and who were unable to make rent or mortgage payments.

The government executives took this decision to curb the pandemic further from spreading. This step was significant, especially when the coronavirus delta variant led to the widespread transmission of infections. However, this decision witnessed challenges from the landlords, who were skeptical about their repayments, being unsure of the period for which the moratorium was to continue.

Benefits

A moratorium benefits the general public, governments, businesses, and certain sections of society, especially in mitigating an immediate crisis-like situation. Let us look at such examples,

It helps in restructuring loan repayments.
Prevents the credit scores from going extremely low or negative
Helps businesses and companies during financial crunch and defers rent payments or other vendor payments.
Allows for postponement of laws or legislations from being implemented in case of opposition.
Reduces the burden on the debtor during a crisis and helps them retain their collateral assets from being seized.
It helps insurance companies by reducing their losses in the case of policies with extremely high claims due to a natural calamity.
Moratoriums may also help an insurance policyholder in case of insurance premiums when a financial crisis-like situation occurs.

Moratorium Period vs Grace Period

A moratorium is often confused with a grace period. However, both are different when it comes to penalization. During a grace period, a debtor gets a time frame to repay an installment or principle amount without attracting any penalty or additions to the principal amount. But in case of a moratorium, the penalty for extra time taken by the debtor is charged.

For instance, a grace period of one year in the case of student loans allows the student and guarantor to make repayment arrangements.

Frequently Asked Questions (FAQs)

What is eviction moratorium?

It is an agreement between a landlord and tenant signed between the two parties in case of a delayed payment of rent. The tenant may be an individual or a small enterprise that cannot make rent payments due to force majeure, financial crisis, or unemployment.

When does the foreclosure moratorium end?

In case of a foreclosure, the lender may become liable to possess the debtor’s property, which they provided as a guarantee for loan repayment. Thus, to avoid such a situation, a debtor may request a foreclosure moratorium. It is usually applicable till the situation normalizes or a crisis subsides.

How to apply moratorium?

An individual can apply for a moratorium at the respective financial institutions who are the lenders, and in the case of insurance, an insurance agent may help facilitate the moratorium.

When do moratoriums end?

A moratorium may end when a crisis or emergency like a pandemic is averted, and the public authorities are satisfied that normal conditions prevail. For loans or premium payments, a moratorium may last upto a year and a half.