#20 - Global Reference, Must Be True, Author's Perspective

[Administrator]

Complete Question Explanation

The correct answer choice is (E).

Answer choice (A):

Answer choice (B):

Answer choice (C):

Answer choice (D):

Answer choice (E): This is the correct answer choice.

This explanation is still in progress. Please post any questions below!

[Fightforthat170]

Hi PS

Can someone help me understand what does E mean?

What does it mean that it is "more expensive to finance the establishment of a new business" ?

What does it mean to "prioritize the orderly discharge of debts" ?

Thanks!!

[Rachael Wilkenfeld]

Hi Fight,

Let's look at the two different systems discussed in the passage. The traditional system prioritized the orderly discharge of debts, but didn't care about noncreditors. The modern system allows for the reorganization of a business in an effort to be equitable to all interested parties, but this might mean the creditors get less than they would have under the traditional system.

So when we look at answer choice (E), it starts by saying that the modern system tends to make it more expensive to finance (get credit) for new businesses than the traditional system did. We can support this from the passage in the last paragraph, where the author says that creditors charge more for credit under a modern system.

Hope that helps!

[gwlsathelp]

What through me off about this correct answer was the use of "new business" nowhere in the passage does it mention a new business. It mentions reorganization of a business, but that does not make it a new business. Since LSAC likes to be sneaky, I wrote the answer choice off.

Looking at it now, I think what the answer choice means is that as opposed to establishing a business back when Thomas Jackson lived and the orderly discharge of debts is prioritized, a business if opened today would be subject to modern bankruptcy laws which are influenced by Donald Korobkin and reorganizationists.

[Fightforthat170]

Hi Fight,

Let's look at the two different systems discussed in the passage. The traditional system prioritized the orderly discharge of debts, but didn't care about noncreditors. The modern system allows for the reorganization of a business in an effort to be equitable to all interested parties, but this might mean the creditors get less than they would have under the traditional system.

So when we look at answer choice (E), it starts by saying that the modern system tends to make it more expensive to finance (get credit) for new businesses than the traditional system did. We can support this from the passage in the last paragraph, where the author says that creditors charge more for credit under a modern system.

Hope that helps!

Thank you Rachael! Do you mind to explain why D doesn't hold true?

Is D wrong because we don't know if the author would think that insolvent companies that re-organized would ultimately pay less % of debt than if they had liquidated assets? The author's main focus of the last paragraph was focusing on a POV from the creditors. So the creditors would receive less % of debt under the more equitable approach. But we don't know the TOTAL amount of debt that the bankrupt company needed to pay out. So technically we never know how the total amount of debt the insolvent company will pay out ultimately changes under different approaches, the author talked about just how each approach benefits or harms the creditors and other affected parties.

[gwlsathelp]

Is D wrong because we don't know if the author would think that insolvent companies that re-organized would ultimately pay less % of debt than if they had liquidated assets? The author's main focus of the last paragraph was focusing on a POV from the creditors.

The key to why D) is wrong is in the first paragraph, especially where the author discusses, "modern bankruptcy laws [...] by allowing companies to stay in business." Insolvent companies that reorganize don't discharge contractually secured claims/debts meaning that the claims are cancelled or forgiven, contractual debts are precluded (excluded) from a company that is still in business. This type of business may repay those contracts at a later date, but it's not prioritized. The passage also doesn't talk about, for either bankruptcy approach, what they do in the case of discharging debts.

Let me know if that helps.

[Fightforthat170]

Is D wrong because we don't know if the author would think that insolvent companies that re-organized would ultimately pay less % of debt than if they had liquidated assets? The author's main focus of the last paragraph was focusing on a POV from the creditors.

The key to why D) is wrong is in the first paragraph, especially where the author discusses, "modern bankruptcy laws [...] by allowing companies to stay in business." Insolvent companies that reorganize don't discharge contractually secured claims/debts meaning that the claims are cancelled or forgiven, contractual debts are precluded (excluded) from a company that is still in business. This type of business may repay those contracts at a later date, but it's not prioritized. The passage also doesn't talk about, for either bankruptcy approach, what they do in the case of discharging debts.

Let me know if that helps.

HI gwlsathelp, thank you for the explanations, but could you explain this part "Insolvent companies that reorganize don't discharge contractually secured claims/debts meaning that the claims are cancelled or forgiven, contractual debts are precluded (excluded) from a company that is still in business." to me again like you're explaining it to a 5 year old?

Is it because they still have to satisfy their liabilities not "discharging the debts" or writing off the debts, like this sentence in paragraph 1 says "Modern bankruptcy laws, by contrast, allow insolvent companies to apply for 'reorganization' which establishes a plan for satisfying liabilities while allowing the company to continue operating."

Maybe it's not prioritized but they ULTIMATELY technically still need to pay those debts off, just in another way besides liquidating or selling off assets.

So D is wrong because as far as the passage notes, the re-organized broke companies still need to pay those debts, instead of just discharging them.

[Adam Tyson]

I think the best reason to reject answer D, Fightforthat170, is that the author says exactly the opposite in the last paragraph. Under the modern approach (Korobkin's), our author says "they (creditors) are likely to recover less in the event of bankruptcy."

Where this can get a little tricky is in the use of the word "discharge" in this context. When a creditor discharges a debt, it means they agree not to collect it. They write it off and give up on being made whole. But in this passage, the author uses the term "discharge" to mean paying a debt - see, for example, this line in the first paragraph: "Traditionally, corporate bankruptcy law placed highest priority on the orderly discharge of debts." That use of "discharge" means "payment" or "satisfaction." Answer D isn't about a creditor discharging (writing off, not collecting) some of what they are owed; it is about a borrower discharging (paying off, handing over) what they owe. Our author thinks the modern approach leads to insolvent companies paying less than they would if they had to sell off assets. Answer D says they pay more.

To put it like you asked for, it's this: if I owe you money, and you discharge the debt, you are saying I can keep the money. But If I own you money and I discharge the debt, it means I paid you back.

This would be a case where anyone bringing in outside knowledge of bankruptcy law might be tripped up by the use of the term "discharge" and misinterpreting its application. If we rely solely on the content of the passage we can avoid that trap. Pretty sneaky, LSAC!

[katnyc]

Can you explain why B is wrong. To me it sounded like it talked about this in the last paragraph in simple words. I can understand answer choice E in the explanation. But to me that sounds like it is similar to B. If anyone could help, that wold be greatly appreciated.

Thanks

[Adam Tyson]

The passage tells us that employees may be vulnerable under one approach, while another approach that is more favorable to them could make things harder for creditors, but the author never takes a position on who is more vulnerable overall. That's why answer B is unsupported by the text, and is a wrong answer.

Also, in that last paragraph, the author writes:

Korobkin 's scheme provides no way of empirically assessing the relative vulnerability to loss of the various parties affected by a corporate bankruptcy.

That tells us that it's unclear who is more vulnerable, rather than telling us that creditors are more vulnerable as answer B states.