Definition of Debt Moratorium
A debt moratorium is a delay in the payment of a debt or other type of monetary obligation. A moratorium can apply to individuals, businesses and municipalities and generally applies for a limited, specified amount of time. A debt moratorium gives the debtor the opportunity to start repaying the creditor at a future date.
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Time
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The moratorium agreement between the debtor and creditor dictates the length of the moratorium. There is no set time for a moratorium as each agreement has unique circumstances. The ideal moratorium scenario would allow for sufficient time so that the debtor can rectify any problems preventing the repayment of the debt to the creditor. In many cases, creditors try to avoid moratoriums. However, given the alternative of writing of the bad debt, some creditors will agree to a moratorium. Moratoriums can also result from a court order or court stipulation.
After the Moratorium
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A moratorium does not automatically fix the debtor's financial problems. In fact, the moratorium simply provides the debtor time before the creditor takes alternative measures to collect the debt. A moratorium is a legally binding agreement and courts will enforce the terms dictated by the moratorium agreement. Terms of the moratorium agreement could dictate anything from restructuring of the debt to completely relinquishing assets to the creditor.
Renegotiate Terms
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Many creditors use moratoriums as a tool to allow time for the creditor and debtor to renegotiate the terms of the debt. Restructuring the debt can benefit both the creditor and the debtor. The debtor benefits by not losing his credit rating. Loss of a credit rating can make it difficult to impossible to secure future financing. The lender benefits by minimizing the loss on the investment.
Debt Forgiveness
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Debt forgiveness occurs when a creditor forgiveness all or a portion of a debt. Creditors will almost always try to avoid debt forgiveness. However, in extraordinary circumstances, creditors have no choice but to forgive the debt. Countries sometimes grant debt forgiveness to one other in certain circumstances. When the creditor forgives the debt, the creditor typically writes of the debt. This can create tax liability for the debtor. Generally, creditors will consider a loan moratorium as an alternative to debt forgiveness.
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