Bankruptcy at the door

Strain: A 24-year-old single mother struggles to keep a roof over her extended family.

Your Money

July 03, 2005|By Janet Kidd Stewart

Meka Payne is living her own worst-case scenario.

As she struggles under the weight of nearly $30,000 in debt and income that doesn't meet her expenses, the 24-year-old single mom's rent is soaring 29 percent next month. Even if she could scrape together enough money to pay for a move to a cheaper place, chances are slim that a landlord would agree to a lease after looking at her credit report. If she stays, the added living expense could push her into bankruptcy.

"You can't afford to move and you can't afford to stay," said Catherine Williams, a veteran debt counselor tapped by Money Makeover to help Payne chart a new course.

Until Williams helped her take a hard look at her financial situation, Payne wasn't aware how dire it was.

"It really opened my eyes to where I am financially," said the resident of Orlando, Fla. "Now that I know, I can tackle it."

That positive attitude is one of a precious few things Payne has going for her right now. She loves her job as an administrator for a small silk-screening T-shirt business, and it pays about $15 per hour for a 40-hour workweek. She also feels blessed to have other family members in her life, including a grandmother and two siblings who live with her and her 3-year-old daughter.

Her parents send about $300 each month to help with expenses for the teenage siblings, and her grandmother chips in $295 a month from her Social Security check to help with the rent.

Her 19-year-old sister recently finished high school and is considering college, while Fayth's father has not been contributing to Payne's expenses.

Payne also has reached out in her community, joining a local church that has become an important part of her life since her move to Florida from Illinois a few years ago. Despite her modest salary and huge debt load, partially run up after she lost her state government job in Illinois, she has maintained her charitable giving at 10 percent of her income.

And she has bigger career goals: Recently, she passed the real estate license exam in Florida.

But the rent increase and debt load, including a $4,000 loan that is in default and ruining her credit rating, are too much for her budget to absorb. One more missed payment could put her at bankruptcy's door, said Williams, vice president of Money Management International, a debt-counseling service.

She points out very quickly that Payne is in trouble. Like anyone else whose expenses exceed his or her income, she needs to revamp her budget immediately.

"Even without the rent increase, there's just a basic fixed cost to live, and it's exceeding Meka's income," Williams said.

Unfortunately, the only slack in the budget that is at all negotiable are two expenses that Payne feels very strongly about continuing: $460 each month for a preschool/day-care center and $250 per month in donations to her church.

"These are very personal items, but we need to put everything on the table," Williams said. "We have a monthly budget shortfall of about $1,300."

Monthly bills total just over $3,000, plus $790 for debt service on her substantial credit-card debt and a $5,000 car note. An additional $12,000 in student loan debt is in hardship deferment. Meanwhile, after-tax income from her job and from the family totals about $2,530.

"Bankruptcy is an option if things continue to get worse, but even that wouldn't discharge the student loans," Williams said.

Williams suggested checking out preschool options at the local YMCA. The organization typically offers financial assistance or scholarships to families in need.

Another option is asking Payne's church for career and financial help. The church also might be a referral source for another apartment that wouldn't require a credit check. Because she's facing an Aug. 1 deadline, this is a top priority, Williams said.

If she drastically cut the donation and day-care expenses and asked for a little more per month from her family members, Payne could just about close the budget gap and start paying down about $400 each month of the debt, Williams said. But a little extra income from a second job could really help, she said.

Janet Kidd Stewart is a Your Money columnist.

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