Is it allowed to file for bankruptcy in Islam?
In the name of Allah, Most Compassionate, Most Merciful.
If the borrower is poor and does not possess the means to pay off the loan, then the Quran gives advice to the lender to give the debtor respite until he becomes capable of paying it off. “If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if you remit it by way of charity, that is best for you if you only knew.” (Surah al-Baqarah, V: 280)
However if an individual is in a position where he is indeed insolvent then he may adopt legal measures to declare bankruptcy. However, it will still be compulsory to repay the debts if one finds himself able to do so in the future.
The Prophet (sallal lahu alayhi wa sallam) said, “The best person is he who
adequately fulfils his debts” (Mishkaat).
Furthermore Abu Huraira (radi allahu anhu) narrates that the Messenger of Allah (sallal lahu alayhi wa sallam) said: “Procrastination (delay) in paying debts by a wealthy man is injustice…” (Sahih al-Bukhari: 3.486)
And Allah knows best.
Darul Ifta, Birmingham