Summary:
According to the online dictionary - Investopedia, the definition of moratorium is "...the legally binding halt to the right of collecting debt." This article is an explanation of how moratorium on payment of loan amortization would be like. If companies whom have borrowed money from creditors and have just been in a some sort of crisis, they should be allowed to deffer to pay their monthly amortization. In the article, it stated some reasons on why borrowers sometimes failed to repay. The article explained that maybe the borrowers have just been through an global crisis, for example, a typhoon. The typhoon can be disastrous which leads a company going bankrupt, which leads to thousands of workers to be unemployed. Moratorium on payment of loan amortization is like a insurance for the less fortunate borrowers, creditors should be more lenient on them by including their loss in their loan balance. In all, moratorium gives more protection to the borrowers and provides a more understanding and socially acceptable business cooperation.
Connection:
Quoting from our textbook, amortization is "..the amount shown as an expense in any period, which sometimes is known as depreciation..." A loan is a liability. The companies lost the ability to pay back their debt and is therefore a negative net worth to the creditors. Regularly, other companies' asset depreciate at a steady rate, calculated by the original cost subtracting the estimated residual value and dividing the whole number by the estimated useful life. Like so, the companies that been through a financial crisis, their assets depreciated maybe more than everyone else, they cannot pay it back even more. At first, when the companies asked for a loan, it is their liability and the accounts receivable for the creditors. However now, when the companies cannot pay back their accounts payable, it creates a negative net worth for the creditors. This may cause the creditors to be in a bit of financial trouble for the creditors as they might not be able to recover their cash flow quick enough to continue their running.
Reflection:
I think that natural disasters can happen anytime of the day. This can be a great risk to companies if they're taking out a loan from creditors because there might a chance that a natural disaster destroys the company and the company will not have the ability to repay the debt. I think this moratorium on payment of loan amortization is a good thing because instead of pushing indebted companies to a financial disaster it gives them a leeway to slowly repay their debt back. If the creditors were to force those companies to repay immediately after a downfall, the companies might file for bankruptcy, that way the creditors will not get their money back for sure. Having a moratorium may be more beneficial for both sides. A great example of this is Hurricane Katrina. The storm had a massive physical impact on the land, affecting 90,000 square miles – an area the size of Great Britain. Over 80 percent of the city of New Orleans flooded. Til now, after 4 years, New Orleans have not yet recover from this horrendous nightmare. The government is giving compensation to all those affected. They are rebuilding communities, providing mortgage and foreclosure relief and counseling for homeowners, creating unique partnerships...etc. For those companies who were indebted, they were given compensation and time to repay their debt back. They were given a chance to start over rather than pushed to the tip of the financial cliff. The creditors, government, and the companies found a balance in between that can be beneficial in the long run.
Kate Wong
