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The unfortunate place of student loans in bankruptcy law

News arrives from Florida that Casey Anthony has filed for bankruptcy protection. She lists $800,000 in debts on her bankruptcy schedules, but only $1,000 in assets. Most of her debt consists of attorney fees to her defense attorney from her criminal trial. While a jury found her not guilty, she still owes her attorney and private investigators.

The Forbes article points out that she can eliminate most of her debts in a bankruptcy filing. However, if you have student loan debts, your situation has to be truly desperate and unlikely to ever improve before you can discharge your student loan debts. Sadly, with the state of the economy, more debtors may meet this standard.

The standard for discharging student loans is undue hardship, which has been defined by federal courts using a three-factor test. If the debtor is unable to maintain a "minimal" standard of living if forced to repay the loans and the debtor's "state of affairs" is likely to continue because of "additional circumstances," and that the debtor has engaged in a good faith effort to repay the loan, a court can grant an undue hardship discharge.

This test is difficult, but not impossible. One study suggests that up to 40 percent of those who apply for an undue hardship discharge receive one. If you believe you could qualify, you should speak with a bankruptcy attorney, as they examine your situation and see the possible solutions that may be available.

Because every debtor is different, the facts of each case need to be reviewed. Even if you cannot qualify for an undue hardship discharge, depending on the size of your other debts and your income, a bankruptcy may still be helpful to your financial situation.

Source: Forbes, "Casey Anthony can declare bankruptcy and expect relief but student loan debtors receive no such protection," Helaine Olen, Jan. 27, 2013

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