Reading Comprehension

PT156 · S1 · P3 · Q20 Bankruptcy Tradeoffs

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Traditionally, corporate bankruptcy law placed highest priority on the orderly discharge of debts; courts generally ordered failed businesses to pay all creditors a set percentage of the amounts owed.

Topic

Corporate bankruptcy law: traditional vs. modern approaches to handling failed companies.

Framework

Present Debate

Main Point

The passage presents a debate over whether bankruptcy law should mainly prioritize the interests of creditors (per Jackson) or account more equitably for all affected parties (per Korobkin), but acknowledges that both approaches have weaknesses. ( in P2 and in P4 both crystallize the main point.)

P1: Traditions and Jackson’s Position

Describes the shift from the old way of handling bankruptcies (paying off creditors by liquidating assets) to the modern approach that allows companies to reorganize. It then explains Jackson's view: bankruptcy law should only maximize and distribute the available assets to creditors as efficiently as possible.

P2: Korobkin’s Critique of Jackson

Introduces Korobkin's argument: Jackson's model ignores the interests of workers, suppliers, and the community, who can also be deeply affected by a company's bankruptcy. He criticizes Jackson’s focus on creditors and advocates for considering the broader impact of closing vs. reorganizing a company.

P3: Korobkin’s Alternative Principles

Explains Korobkin's approach, which involves including all affected parties when making bankruptcy decisions and using "rational planning" to decide whose interests to prioritize—particularly, protecting those worst affected by bankruptcy.

20.

The author would be most likely to agree with which one of the following statements?

The short-term consequences of modern
Unsupported Comparison: predictable
Nothing in the last paragraph has anything to do with predicting short-term consequences of modern laws vs. traditional laws. The concept of "how predictable the consequences are / aren't" is nowhere in the passage.
4% picked this
The creditors of failed corporations
Unsupported Comparison Opposite, if anything
The author, in the final sentence of the passage, is expressing that we don't know which one more vulnerable or more distressed. Her complaint is that K's "scheme provides no way of empirically assessing the relative vulnerability to loss of the various parties affected".
18% picked this
Korobkin's conception of the purpose
Opposite
Jackson's plan is identified in the passage (by his words, end of 1st paragraph) as the efficient one. The author never pushes back on that. The author says (beginning of last paragraph) that K's is the more equitable plan. K's plan is much more complicated because we have to consider a much wider swatch of stakeholders. That sort of guarantees it'll be less efficient than, "Sell off the company. Put that money in a pot. Divide up proportionately among creditors."
6% picked this
Insolvent companies that are allowed
Unsupported Comparison Opposite, if anything
The first sentence of the passage talks about discharging debt, which was the priority of the Old method. "Allowed to reorganize" is a codeword for the New method. So this answer is saying, "The New method of bankruptcy ultimately discharges a greater portion of debt than does the Old method of bankruptcy (which placed highest priority on the orderly discharge of debts)." That doesn't make any sense. In fact, it seems backwards. The companies that are allowed to reorganize, under modern laws, don't necessarily discharge their debts at all. They get a new plan for satisfying liabilities while allowing them to still operate. Note: discharging debt is a confusing term to a lot of us. It means to agree to pay off a certain percentage of a loan in return for forgiveness of the loan. During a bankruptcy proceeding you would discharge your $100k student loan to Fannie Mae by agreeing to pay $30k of it. Once Fannie Mae agrees to that discharge, they can't come after you for the rest of the $100k later.
18% picked this
Correct
Bankruptcy laws that place a
Why this is right
This is supported in the last paragraph by the 1st and 2nd of the three details we pulled out: - K's approach is more equitable than J's, but has two problems: - the more we include other affected parties, the less likely creditors are to be paid back as much, which means they'll start to judge their risk of lending differently and increase interest rates for borrowers, which ain't great for the economy. In this answer, "laws that place a high priority on equitable treatment" is a reference to Korobkin's modern approach. The author believes that "under such [an approach], creditors charge more for credit, a result that has its own adverse economic effects." What's the adverse economic effect of borrowing interest rates rising? How does the economy suffer when it's more expensive to borrow money? It suffers because existing companies can't finance expansion and because entrepreneurs can't finance the startup costs of a new business. Understanding this answer isn't really possible without a common sense knowledge of how credit works, who uses it, and how higher / lower borrowing rates impact the economy. (It's worth noting that correct answers sometimes lean pretty heavily on "outside knowledge", in case you're thinking that's an unforgivable sin)
Skill tested: Author Opinion · how this choice captures the passage's function is the move to repeat next time.
55% picked this

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