Debt Moratorium

Debt moratorium summary:

• Debt moratoriums can be government-imposed or voluntary between you and your creditor.

• Your lender might agree to a debt moratorium that pauses your payments for up to a year.

• Since moratoriums are temporary, have a plan for how to manage your payments once they resume.

Debt Moratorium Definition and Meaning

A debt moratorium is a temporary pause or delay of debt payments given to borrowers facing financial hardship; debt moratoriums are sometimes also called forbearance.

The goal of a debt moratorium is to give you the space to regroup or recover after financial hardship like job loss or the death of a breadwinner so you can better manage your payments after the moratorium.

Debt moratoriums are short-term debt relief measures that typically only last a few months or up to a year. A debt moratorium is not a long-term solution or form of debt forgiveness.

Types Of Debt Moratoriums

Generally, there are two types of debt moratoriums:

• Government-imposed moratoriums. This is when the government pauses payments for certain types of debts across broad portions of the population. A recent example would be the temporary moratoriums put in place in response to the COVID-19 pandemic.

• Voluntary moratoriums. This is when you enter an agreement with your creditor to pause your payments because you're experiencing an unexpected financial hardship. This is also sometimes known as loan or credit card forbearance.

Pros and Cons of a Debt Moratorium

Here are a few key positive and negative features of a debt moratorium.

Pros

The biggest benefit of a debt moratorium is that you don't need to make payments on that debt. This frees up money to address other concerns, such as managing essential bills while unemployed. A debt moratorium can also help prevent default, foreclosure, or bankruptcy if you need time to recover during financial hardship.

In some cases, a debt moratorium could also include restructuring of the debt. That could help you get back on track once payments resume. For example, your creditor may lower your interest rate or waive certain fees or extend your repayment period, all of which could make the debt easier to manage going forward.

Cons

The major drawback of having your debt payments paused is that you may still accrue interest during the moratorium. This means you could owe more money once you resume payments, thanks to additional interest fees.

A debt moratorium is a short-term measure, not a long-term solution. You need to have a plan to get back on track once the pause is over and payments resume.

Can a Debt Moratorium Be Extended?

Sometimes. Whether a debt moratorium can be extended depends on the circumstances, and it likely requires additional negotiations with your creditors.