Negative Net Worth
To say a person has negative equity is the same as to say they have "negative net worth" (where their liabilities exceed assets). One might come to have negative equity as a result of taking out a substantial, unsecured loan. For example, one might use a student loan to pursue higher education. Although education may increase the likelihood of higher future earnings, that potential is not a financial asset.
In the United States, student loans are non-dischargeable in bankruptcy, and typically lenders provide student loans without requiring security. This stands in contrast to lenders requiring borrowers to have an equity stake in a comparably-sized real estate loan, as described above, secured by both a down payment and a mortgage. An explanation for the willingness of creditors to provide unsecured student loans is that, in a practical sense, American student loans are secured by the borrower's future earnings. This is so since creditors may legally garnish wages when a borrower defaults.
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