DEFINITION of Deficit Net Worth
Deficit net worth is a scenario in which liabilities are higher than assets. Deficit net worth can occur for a variety of reasons, but typically it arises when current or future asset values erode unexpectedly. For example, during the global financial crisis in 2008 when home values fell, many people were left owing more on their mortgage than the home was presently worth. Since a home is often the largest asset a person will own, this led to many households experiencing a deficit net worth. Likewise, in frontier days, land and property often gained or lost value suddenly depending on where the nearest railroad was located. Deficit net worth is also known as negative net worth.
BREAKING DOWN Deficit Net Worth
A negative, or deficit, net worth does not necessarily imply bankruptcy. Just as quickly as asset values can plunge, they can also rise. As the global financial crisis of 2008 began to recede, housing prices recovered. Many people who were able to hold onto their homes saw the values rise in subsequent years. Similarly, stock prices can be extremely volatile. A person who has a majority of their net worth tied up in their stock portfolio may experience a temporary deficit net worth if the market corrects and the portfolio loses a large portion of its value. This may only be a temporary situation if the market recovers its value and the individual maintains their holdings through the downturn.
However, a deficit net worth can at times negatively influence future financing opportunities and stifle future business growth. If you'd like a tool to determine if you're experiencing a negative net worth you can use our free Net Worth Tracker which allows you to calculate, analyze and record your net worth for free.