Islamic Rulings on Bankruptcy and Rights of Creditors

✍ Written by: Imran Ayyub Lahori

❀ Definition and Explanation of the Bankrupt (Muflis)​

Linguistic Meaning:
A bankrupt person is called Muflis.

• باب أَفْلَسَ يُفْلِسُ: to be left with nothing; to become bankrupt
• باب فَلسَ يُفَلِّسُ: to declare bankrupt
  References: [لسان العرب: 318/10 ، المنجد: ص / 653]

Technical Definition:
When a ruler declares a debtor bankrupt and prevents him from using his wealth.
References: [سبل السلام: 1160/3 ، بداية المجتهد: 280/2 …]


Imam Shawkani (رح) said: Muflis is the one whose debts exceed his wealth.
Reference: [نيل الأوطار: 267/3]

❀ Rights of Creditors over the Wealth of the Bankrupt​

It is permissible for creditors to take whatever is found with the bankrupt, except those things without which survival is not possible such as:

• House
• Clothing
• Winter protection
• Food for him and his family

❀ Prophetic Guidance on the Case of Bankruptcy​

➊ Hadith of Abu Saʿid Khudri (RA):
During the Prophet’s ﷺ time, a man suffered heavy losses in fruit trade and became bankrupt. The Messenger of Allah ﷺ said:
تصدقوا عليه
"Give charity to him."


People gave him charity, but it was insufficient to clear the debt. Then the Prophet ﷺ said to his creditors:
خذوا ما وجدتم وليس لكم إلا ذلك
"Take whatever is available; you have nothing beyond that."
Reference: [مسلم: 1556]


Imam Shawkani (رح) explained: From this Hadith it is derived that when a bankrupt person cannot pay full debt, he must hand over all his wealth (except essentials) to the creditors. He is not liable beyond that, and if he later becomes wealthy, the remaining debt does not revive.
Reference: [نيل الأوطار: 628/3]

❀ Claiming Back One’s Property from the Bankrupt​

➊ Hadith of Samurah (RA):
من وجد متاعه عند مفلس بعينه فهو أحق به
"Whoever finds his property in the possession of a bankrupt person, he has more right to it."
Reference: [ضعيف ابو داود: 1758]


➋ Hadith of Abu Hurairah (RA):
من أدرك ماله بعينه عند رجل أفلس فهو أحق به من غيره
"Whoever finds his property with a bankrupt person has more right to it than others."
References: [بخاري: 2402 ، مسلم: 1559 …]


➌ If the seller has already received partial payment, he is not exclusively entitled to the item, but will share equally with other creditors.

• This is the opinion of the majority.
• Imam Shafiʿi (رح) differed, but stronger evidences support the majority.
  References: [سبل السلام: 1163/3 ، نيل الأوطار: 629/3]

❀ Distribution of Wealth Among Creditors​

• If the debtor’s wealth is insufficient to cover the debt, the available assets are distributed equally among all creditors.
• Once a person is declared bankrupt, imprisoning him is not correct.

Allah Almighty says:
وَإِن كَانَ ذُو عُسْرَةٍ فَنَظِرَةٌ إِلَىٰ مَيْسَرَةٍ ‎[البقرة: 280]
"If the debtor is in hardship, then (grant him) time until ease."

❀ Delay in Payment by the Wealthy​

➊ Hadith of Abu Hurairah (RA):
والظلم مطل الغنى
"Delaying payment by a rich person is injustice."
Reference: [صحيح نسائي: 4371]


➋ Hadith of ʿAmr ibn Shuraid (RA):
لـى الــواجــد يــحــل عـرضـه و عقوبته
"The delay of a wealthy person tarnishes his honor and makes him liable for punishment."
Reference: [نسائي: 4372 ، ابو داود: 3628]


If it is unclear whether the debtor is rich or poor, investigation should be made.

• If rich: wealth can be extracted through imprisonment and punishment.
• If poor: he must be given time until ease.
  Reference: [الروضة الندية: 519/2]

❀ Authority of the Ruler Regarding the Bankrupt​

• The ruler can prevent a bankrupt from managing his wealth and sell his assets for repayment.
• Example: Prophet ﷺ restricted Muʿadh (RA) from using his wealth and sold it for debt repayment.
  Reference: [ضعيف: إرواء الغليل: 1435]
• Sayyiduna ʿUmar (RA) also prevented a debtor from using his wealth and distributed it among creditors.
  Reference: [مؤطا: 770/2 ، بيهقي: 49/6]

Imam Shawkani (رح) said: None of the Companions opposed ʿUmar (RA) in this act.
Reference: [نيل الأوطار: 632/3]

❀ Restriction on the Foolish and Reckless​

Allah Almighty says:
وَلَا تُؤْتُوا السُّفَهَاءَ أَمْوَالَكُمُ ‎[النساء: 5]
"Do not entrust your wealth to the foolish."

• Tafsir al-Kashshaf: السفهاء المبذرون
  "The foolish are the spendthrifts who waste wealth."

Examples:

• ʿAli (RA) intended to restrict ʿAbdullah ibn Jaʿfar (RA) from managing wealth, but since al-Zubair (RA) was his partner, ʿUthman (RA) did not enforce it.
  Reference: [إرواء الغليل: 1449]
• A man freed his slave to take effect after his death while having no other wealth. The Prophet ﷺ canceled this and sold the slave for repayment.
  Reference: [بخاري: 2415]

Ibn Hajar (رح) explained: Restricting the foolish from managing wealth protects assets, since wealth is meant for benefit, not destruction.
Reference: [فتح الباري: 350/5]

❀ Ruling on Adults​

• Majority: It is permissible to restrict an adult who is wasteful or incapable.
• Abu Hanifah (رح): It is not permissible.
• Rajih View: Even adults can be restricted if they are foolish, since they too can waste wealth.
  References: [فتح البارى: 350/5 ، نيل الأوطار: 633/3]

Summary:

• Creditors may only take what is available from a bankrupt person, except essential needs.
• If the debtor has no assets, he must be granted time until ease.
• Delaying repayment by the wealthy is a sin and injustice.
• The ruler may restrict the bankrupt or the foolish from handling wealth to protect rights and assets.