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Personal liabilities, debts & loans

Video: Zakat on personal deductible liabilities - Imam Abid Khan

What has Zakat got to do with debt?

Zakat is payable on strong debts, i.e. money that is owed to you that you are confident will be paid. This may include personal loans to friends and family. This does not include outstanding wages, dowry, inheritance or assets held in trust (other than assets held under a Bare Trust).

Zakat is a fair concept, it is not imposed to unfairly take funds from you and leave you without the means to go about your day to day life at the standard you are used to. Everything in Islam is fair masha’Allah and Zakat is no different.

Certain liabilities/allowances can be deducted from your Zakatable assets before calculating how much Zakat you owe. Some debts must be included into your Zakat calculation, others do not need to be. Debts and liabilities when calculating Zakat are very important factors that must be taken into account.

Examples of debt

Debts can be put into different categories, such as:

  • Qard e Hasan - when you lend someone money and they owe you
  • Mahr (dowry)- where one part of the debt is paid and the remaining part is to be paid later
  • Latepayer - A person who hasn’t paid their Zakat for several years has a type of debt
  • The sick - A person who is unable to fast and unable to pay the fidya, has a type of debt
  • Instalments - A vehicle bought and paid for in instalments, is a debt

When calculating Zakat, you need to determine whether the debt is owed to you, or whether you owe a debt to others. We will first look at the debts you owe to others.

Debt you owe to others

Whether you need to pay Zakat if you already owe money to others is debated by scholars but there are two major opinions on this matter:

  • First opinion: Majority of the scholars are of the opinion that debts are deductible. Debt affects Zakat because the debtor doesn't really own his money. His money is in reality someone else's.
  • Second opinion: Some scholars are of the view that debts are not deductible.

Which debts can be deducted from your calculation?

Once you have considered the different opinions, you need to understand and apply the following:

  • Short-term debts such as outstanding or overdue living expenses (such as rent payments or utility bills) can be deducted from your Zakatable assets.
  • For long-term debt, such as mortgages or student loans, the non-interest or principal portion only of the forthcoming lunar year's worth of payments can be deducted for Zakat calculation purposes.

So you can consider deducting the following debts from your Zakatable assets:

  • Outstanding/overdue basic living expenses
  • Personal debts
  • Money owed to third-parties for completed purchases
  • Outstanding dowry owed/intend to pay

Debts owed to you

Zakat is payable on strong debts, i.e. money that is owed to you that you are confident will definitely be paid. This type of debt includes loans to friends and family but does not include inheritance, outstanding wages, dowry etc.

Scholars have divided this type of debt - into two different types:

1) The good debt: where the debtor is willing to give the money back in time.

  • Zakat should be paid by the creditor on this type of debt

2) The bad debt: when it has become very unlikely to retrieve money from a debtor either due to a lack of evidence coupled with the denial of the debtor. There are differing views whether Zakat is binding now and upon the unlikely event of retrieving these funds:

  • First opinion: There is no Zakat on this wealth now nor upon the unlikely event of retrieving these funds. This is the view of the Hanafi school.
  • Second opinion: Upon the unlikely receipt of these funds, Zakat will be paid only for one year and not all the years the money was outstanding. This view is attributed to the Maliki school.
  • Third opinion: Zakat will be binding for all the previous years upon the unlikely receipt of these funds. This view is attributed to the Shafi'i school.

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