Negative net worth is a situation where a person’s debts exceed their assets.
Negative net worth can occur for several reasons: through excessive spending, through a major investment that failed, or through the complete loss of everything owned. This article will discuss negative net worth, its causes, and how to deal with it.
What is Negative Net Worth?
In simple terms, Negative net worth is a situation in which a person’s liabilities or debts are higher than their assets. This results in a negative figure when an individual calculates their net worth by subtracting total liabilities from total assets.
The term can also apply to corporations and governments that have more debt than capital.
Negative Net Worth for Individuals
Individuals with negative net worth typically have high amounts of personal debt, and their assets aren’t enough to cover their debt payments if they are suddenly unable to earn income. For example, many people who get into car accidents and are unable to work for months are often at risk of negative net worth if they don’t have sufficient emergency savings.
Companies with a negative net worth may be able to maintain this status for some time without going out of business because they can continue generating revenue and using it to pay down debt. However, companies must eventually turn a profit
Negative Net worth for Companies
Company net worth is a key indicator of financial health. It represents the assets owned by a company minus its liabilities. If a company has more liabilities than assets, it has a negative net worth.
For businesses, negative net worth is not unusual. For example, it’s common for small businesses to have a negative net worth when they are first starting up. In this case, the owner is contributing more to the company than the company is worth.
A company can have a negative net worth for several reasons:
It may have purchased too many assets or have underpriced its liabilities. A good example of this might be an out-of-control merger and acquisition program that failed to generate positive synergies and created more debt than value.
It may have taken on too much debt, which is often seen in companies that are growing rapidly but are not yet profitable.
It could be writing off large chunks of bad debt as non-performing loans or investments.
Negative Net Worth for Students and Young People
Negative net worth is a common situation for young people at the beginning of their careers when they have student loan debt and few assets.
As long as you’re paying your bills on time, having a negative net worth can’t hurt your credit, because there’s no information about your net worth in your credit report. However, these are the main risks:
Your debt-to-income ratio could be too high. Lenders look at this ratio when you apply for new credit cards or loans. If it’s too high, they may deny you credit.
You could struggle to get approved for new accounts if your debt payments are already too high. This is where having a low debt-to-income ratio is helpful — if you’re not spending much income on debt, you can afford to take on more debt.
Effects of Negative Net Worth and How to Overcome
Negative net worth for individuals is a common situation and one that can be resolved over time. If you have a negative net worth, then you have liabilities that are greater than your assets. You may be in debt, or you may have overvalued your assets. Both situations can be fixed with a little bit of work and some financial discipline.
Determine the value of all your assets and liabilities so you know where you stand. Assets are things that are valuable — cash, investments and real estate. Liabilities are things you owe, including credit card balances, home loans and car loans. If your liabilities are greater than your assets, then you have a negative net worth.
If you’re in debt, create a budget based on your current income and expenses. Make sure your expenses do not exceed your income. Your budget should include loan payments and savings goals as well as everyday expenditures such as groceries or utility bills. The idea is to make sure that all these things fit within the limits of what you earn each month.
Get rid of credit cards so that you don’t have to worry about them anymore. Cut each card up so that it’s no longer usable. You don’t want to rely on credit cards for any purchases because this will only add to your
As an individual, negative net worth can be a sign of financial distress, because it indicates that you owe more than all your assets are worth. For example, if your assets are worth $100,000 and you owe $200,000 in debt, then you have a negative net worth of $100,000.