Take Letters Of Credit As Collateral? Think Again!
Law360, New York (April 8, 2008, 12:00 AM EDT) -- Taking a letter of credit as collateral from a borrower teetering on the edge of bankruptcy is considered one of the safest things for a lender to do. After all, the "independence principle" provides that a letter of credit and its proceeds are not part of the debtor's estate in a bankruptcy. Letter of credit drawings must be paid even if the borrower goes bankrupt.
Regardless, the lender may have to give up all proceeds from the letter of credit.