Today’s interesting case is a situation that I see many clients facing: an income problem that is a more urgent and serious problem than their debt problem. Today’s case involves a lady that we’ll call “RC.” She is a CNA that gets take-home pay of about $1,950 per month. RC used to make about $1,000 more per month, but there is not as much work available due to cuts in Medicare reimbursements. (About 80% of the clients I see have experienced a loss/decrease of income or a divorce.)
RC’s house payment is $612; her utilities, phone and cable are $444 monthly; her food, clothing, gasoline miscellaneous expenses are $880 monthly; her life and car insurance expenses total $165 per month, which brings her sub-total to $2101 per month. That means RC is running out of money before she even gets to her car payment. Add in her vehicle payment, and RC’s total living expenses are $2,630 per month. Compare that to her income of $1,950, and RC is short $680 per month before she even gets to her credit cards, medical bills, signature loans and personal loans.
Please note that the only two debts that are included in RC’s list of living expenses are her house and car payments, because if you want to keep those things, you must continue to pay for those things. Typically, the only way you lose your house and car is you stop paying for your house and car.
In a situation such as this, where the income is $1,950 and the living expenses are $2,630, the person faces an income problem as their most urgent problem. Sure, RC’s credit cards, medical bills, signature loans and personal loans are a significant problem for her, but it is not as urgent as her income problem. Bankruptcy can solve debt problems, but it cannot solve income problems. The only way to solve an income problem is to either raise your income or decrease your living expenses, however it usually requires you to do both: raise income and decrease expenses.
Fortunately for RC, she has about $4,000 in savings that she is using to cover her income problem. However, every household has the task of living within the income that is brought in each month. That means you must rely on cash flow (monthly income) to cover living expenses and debts rather than use cash savings. Cash flow and cash savings are, in some ways, completely different. Using cash savings to cover living expenses or debt payments only works as long as the cash is there, whereas cash flow (monthly Income) is usually there every month to take care of those monthly expenses, assuming that your cash flow (monthly income) is enough to cover your living expenses and debt payments.
This scenario resembles about 1/3rd of the cases that I’ve been seeing lately, although most of the people that I see have already run out of savings and they are using help from family or friends to cover the difference between their income and their expenses. The usual recommendation for the client in this situation is to solve the income problem, then come back and we’ll look at ways of solving the debt problem. Some bankruptcy attorneys would recommend that the client use some of the savings to file bankruptcy to take care of the credit cards, medical bills, personal loans and signature loans. However, my view is that when there is an income problem, the client typically needs their cash savings to keep a roof over their head, lights on, food on the table, etcetera. Bankruptcy is best used as a way to mop-up all the dust after the dust has settled. So, when someone is still in a state of change, it is usually best to suggest that they wait until they solve their income problem before they focus on their debt problem.