Answered by Shaykh Hamza Karamali, SunniPath Academy Teacher
If one is $20,000 in debt yet they have with them $5000 (more than the nisab) to take care of their yearly expenses etc and they have this $5000 for over a year then does he have to pay zakat for this money that one has but they are in debt for an amount greater than what they have. Please explain
(See reliance h1.6 :
Someone with only the zakat-payable amount (O: of gold or silver) must pay on this amount even when he is in dept for an amount equal to it, for depts. Do not remove the obligation of zakat)
In the Name of Allah, Most Merciful and Compassionate
According to the soundest position (al-aDHhar) in the Shafi’i school, a Muslim in debt must pay zakat on money in his possession even if his debts add up to more than everything he owns. In the situation described above, zakat would be due on the $5000.
Interestingly, if the creditor is Muslim, he must also pay zakat on the money that he has loaned out for the entire period that it was in the possession of the debtor once the loan becomes due and he is able to regain possession of the money.
[Mughnial-Muhtaj, 1:603,604 (Dar al-Ma’rifa); Bughyatu’l-Mustarshidin, 98 (Mustafa Babi al-Halabi)]
And Allah knows best.
Hamza Karamali