In holy book Qur’an, Allah says about debt (meaning):
“And if someone is in hardship, then [let there be] postponement until [a time of] ease. But if you give [from your right as] charity, then it is better for you, if you only knew.” [Al-Qu’ran, Al-Baqarah (2): 280]
During the time of Jahiliyyah (the era before Islam), when a debt became due to the creditor would say to the debtor, “Either pay now or interest will be added to the debt.”
Allah encouraged creditors to give respite to the debtors regarding their debts and promised all that is good and a great reward from Him for this righteous deed. Abu Hurairah narrated that Allah’s Messenger said:
The Prophet (ﷺ) said, “There was a merchant who used to lend the people, and whenever his debtor was in straitened circumstances, he would say to his employees, ‘Forgive him so that Allah may forgive us.’ So, Allah forgave him.” [Narrated in Sahih al-Bukhari no. 2078]
In terms of zakat on debt, the majority of the scholars distinguish it between two kinds of debt:
1. If the debt that you are owed is with wealthy people who can pay you your right when you request it, then you must pay its zakat, whenever a year passes on it. Abu ‘Ubaid reports this opinion from the companions of the Prophet, ‘Umar, ‘Uthman, Ibn ‘Umar and Jabir and from the Tabi’in such as Mujahid, Ibrahim and Maymun bin Mahran (Source: Al-Amwal: 432)
2. If the person who owes the debt is having difficulties, but he keeps putting you off and you are not able to take it from him or the debt was denied by the debtor, then there are three views about zakat on these debts:
The first view; the creditor must pay zakat for all past years when receiving the repaid debt, if ever. This is the opinions of companions of the Prophet ‘Ali and Ibn Abbas.
The second view; the creditor, on receipt of the debt, must pay zakat for only the last year. This is the view of Hasan, ‘Umar Abdul Aziz and Malik.
The third view; the creditor does not owe any zakat whatsoever (sort of he/she does not own that particular money) until when the debt is paid back it starts a new year for zakat.
**The best view from the opinions of the scholars (by referring to Fatawa Islamiyah and Fiqh Az-Zakah) is that there is no zakat in this until you receive it. Then, when you receive it, you pay one year worth of zakat on it, even if it remained with the debtor for many years. (Refers Fatawa Islamiyah: 3/186, Fiqh Az-Zakah: 1/152 – 155)
Image Source: Ehud Neuhaus