Last Month Rent from Security Deposit

[Pavan Krishna]

Hello my fellow BP-ers,  I'm an out-of-state landlord.  I'm in Oregon with the property is in the bay area California.  Tenants of one of the properties, will be vacating when lease expires (at the end of June).  This week the tenant informed me that they "were hit with some unexpected medical bills and will not be able to pay the June (last month) rent.  Please deduct from Security Deposit."  I did not agree with this as this will leave me with $500 for covering any rent-ready repairs.  $500 will be highly insufficient for that purpose.  The tenants say that they "cannot pay and asked me to go-ahead and hold them in default."  What are my options now?

I can give 3-day notice for not paying rent.  But, they are about to leave in a month.  Is it worth arguing with the tenants?  I'm concerned that they can do more damage on their way out, leaving me with bigger repairs than the typical turnover repairs.  Any advice is welcome.