PT92.S3.Q20 - Bankruptcy Laws

jacob.elser2jacob.elser2 Member
edited October 2021 in Reading Comprehension 63 karma

Another recent RC question where I feel like there's something I'm just not getting about RC. (D) seems well-supported to me: if forced to liquidate, a bankrupt company will only pay its lenders, and through a fire sale/liquidation. With the reorganization system, the business restructures, in a way that should allow them to pay off more than just their lenders, but other stakeholders as well.

With (E), "finance the establishment of a new business," I get that it's vaguely supported by the notion that lenders may charge more if reorganization is the system rather than liquidation, but this seems like a needle-in-a-haystack inference and I'm still not seeing what makes it any better than (D).

Taking the LSAT on Tuesday and I swear RC will be the death of me. I'll get -0 LG and -0 or -1 LR and then bomb -3 or -4 RC and have to retake. Unless you wise people can help, lol.

Comments

  • cwlawlawcwlawlaw Alum Member
    edited October 2021 29 karma

    Hello, Jacob. I feel like I'm answering all of your questions lol. Thanks for putting your thought processes at least; it really helps to see how someone thinks about approaching problems to be able to give best advice.

    You wrote, "with the reorganization system, the business restructures, in a way that should allow them to pay off more than just their lenders, but other stakeholders as well." I could see how the line in the beginning where reorganizations "establishes a plan for satisfying liabilities while allowing the company the continue operating" would support this. However, this is only a plan, not a guarantee.

    Look at the language of answer choice D. The word "ultimately" means this answer implies that in every case, insolvent companies being allowed to reorganize would be a better option for creditors as opposed to forced liquidation. The passage doesn't go so far to make such a confident claim, and I think you reached too far beyond the text here.

    For questions like these, it's also important the remember that we're concerned with the author's view, not what is most likely "supported by the passsage". The author's opinion in the last paragraph specifically writes that under Korobkin's view, creditors are "likely to recover less in the event of bankruptcy". There is definitely an overall tone that the author believes Korobkin's view is less beneficial for creditors and would thus disagree with D.

    Now let's look at E. This was directly supported by a line in the last paragraph where the author criticizes Korobkin's view. "Under such a regime (Korobkin's view), creditors charge more for credit, a result that has its own adverse economic effects." In essence, it's going to be harder to get a loan to finance a new business under Korobkin's view.

    It's helpful to remember we're look for the author's opinion here and any stance that they take on the issue. If I'm asking myself between D and E, which is the author more likely to support, I would definitely choose E.

    As a note, RC took me the longest the finally "get". It takes a lot of practice to see the subtly of it. If you're not feeling confident yet, consider postponing until you are as opposed to potentially having a non-ideal score on record.

  • jacob.elser2jacob.elser2 Member
    63 karma

    Thanks for the insight. I think I struggle on "author agree" questions more than I should because I don't take into account the author's specific viewpoint enough. Doing so may have gotten me to the right answer here...not so much on #7 maybe but that's okay :) Thanks again!!

  • LawyeringForLifeLawyeringForLife Alum Member
    edited October 2021 278 karma

    D actually has a very specific problem: the word "discharge."
    Discharging debt means you don't have to pay it.
    Traditional bankruptcy means liquidation and creditors getting back certain % of their investment. The modern law focuses on restructuring, so the company can continue to function as well as have a plan for satisfying obligations.
    Here we need to make a "reasonable assumption" - satisfying debt means to completely cover it. Why would the Au agree that restructuring would lead to more debt getting written off, if the whole purpose of the process is to increase the likelihood that the debt is actually paid? We can go as far as to say that D goes against the premises that we were operating under.

    With E we have another "reasonable assumption." In modern day economics credit is the lifeline of business. Higher cost of credit increases the financial burden on the business that is taking it. Since liquidation does not involve gaining access to new credit per se, it is reasonable to assume that the added cost does not apply.

    I am not a fan of LSAC's "reasonable assumptions" idea at all, but with time and practice your intuition definitely starts picking up on that distinction.

  • leoxnardxleoxnardx Alum Member
    82 karma

    Hey I think the problem with AC D is that the comparative part. From the passage, I dont think we can comfortably infer that either method of bankruptcy law can lead to discharging more proportion of debts. Yes, as you said, there might be more people getting benefitted in the method the guy Korokin advocates, but at the same time, do we know that it gives back MORE, GREATER PROPORTION of debts? We don't know, we only know that maybe, just maybe, debts are reaching more people, more than just the creditors. Plus, the most fatal mistake might be that we are not sure whether the author agree with this or not. Author does not present an opinion on this comparative issue, instead the author is quite critical to Korokin's method.

    E is right for the same reason that you mentioned, but I think it stands pretty good. If the creditors charge more for credits, we can infer that the price for people to borrow money, aka more expensive for people to borrow money and establish business. And we know that the author would agree with this, since the last paragraph was the author's criticism on the Korokin's method.

    Hope this helps.

  • CEOofgettinga170CEOofgettinga170 Alum Member
    128 karma

    @leoxnardx said:
    Hey I think the problem with AC D is that the comparative part. From the passage, I dont think we can comfortably infer that either method of bankruptcy law can lead to discharging more proportion of debts. Yes, as you said, there might be more people getting benefitted in the method the guy Korokin advocates, but at the same time, do we know that it gives back MORE, GREATER PROPORTION of debts? We don't know, we only know that maybe, just maybe, debts are reaching more people, more than just the creditors. Plus, the most fatal mistake might be that we are not sure whether the author agree with this or not. Author does not present an opinion on this comparative issue, instead the author is quite critical to Korokin's method.

    E is right for the same reason that you mentioned, but I think it stands pretty good. If the creditors charge more for credits, we can infer that the price for people to borrow money, aka more expensive for people to borrow money and establish business. And we know that the author would agree with this, since the last paragraph was the author's criticism on the Korokin's method.

    Hope this helps.

    Hey! Thank you for your explanations I'm also struggling with this question. I have a follow up questions:

    You said "do we know that it gives back MORE, GREATER PROPORTION of debts?" Do you mind elaborate a bit about how'd you get there, because I interpreted D as saying, under re-organization, insolvent companies discharge more % of debt than... so they pay fewer % of debt compared to liquidated companies. Then creditors would receive less % if a company re-organizes.

    And that's where I thought D is supported since the author was disagreeing with Korobkin's approach, because he said "a fair accounting of the interests of other affected parties represents an increase in risk to creditors, since they're likely to recover less in the event of bankruptcy."

    Thank you in advance!

  • CEOofgettinga170CEOofgettinga170 Alum Member
    128 karma

    @LawyeringForLife said:
    D actually has a very specific problem: the word "discharge."
    Discharging debt means you don't have to pay it.
    Traditional bankruptcy means liquidation and creditors getting back certain % of their investment. The modern law focuses on restructuring, so the company can continue to function as well as have a plan for satisfying obligations.
    Here we need to make a "reasonable assumption" - satisfying debt means to completely cover it. Why would the Au agree that restructuring would lead to more debt getting written off, if the whole purpose of the process is to increase the likelihood that the debt is actually paid? We can go as far as to say that D goes against the premises that we were operating under.

    With E we have another "reasonable assumption." In modern day economics credit is the lifeline of business. Higher cost of credit increases the financial burden on the business that is taking it. Since liquidation does not involve gaining access to new credit per se, it is reasonable to assume that the added cost does not apply.

    I am not a fan of LSAC's "reasonable assumptions" idea at all, but with time and practice your intuition definitely starts picking up on that distinction.

    Hey! Thank you for your explanations I'm also struggling with this question. I have a follow up question:

    You mentioned that "Why would the Au agree that restructuring would lead to more debt getting written off, if the whole purpose of the process is to increase the likelihood that the debt is actually paid?" Where do you find support that show author's POV as being supporting a particular side/theory? Because, besides the last paragraph where the author is pointing out some weaknesses in Korobkin's approach, I couldn't find anything that definitively show the author's opinion. "We can go as far as to say that D goes against the premises that we were operating under." Could you elaborate a bit more on the premisses that we were operating under?

    Thanks in advance!

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