Is it permissible to declare bankruptcy in Islam, to whom is the money returned when one is able to do so, and what are the related directives?

The bankrupt person is one whose due debts exceed his wealth. If the creditors demand that the ruler place an interdiction on him and distribute his wealth among them, this must be granted. Interdiction is of two types: for the benefit of others, such as the bankrupt, and for the benefit of the interdicted person, such as the minor and the profligate.

The debtor is interdicted if his wealth is less than his immediately due debt, after the creditors' request, so that he does not harm them, and his bankruptcy is declared. If his wealth is more, he is compelled to pay through imprisonment and chastisement. If he refuses, the ruler sells his wealth. As for the insolvent debtor, he is given respite.

The rulings on interdiction are four: 1. The right of the creditors is attached to his existing wealth and whatever comes into being after the interdiction. His disposal of his wealth is not effective, and he is forbidden from harmful disposal before the interdiction. 2. Whoever finds the exact same item of his property with him has the right to reclaim it under certain conditions, including: the bankrupt person remains alive, the full price remains as a debt on the bankrupt, the item remains whole and in its original state, no right of another is attached to it, and it has not undergone an attached increase. 3. The cessation of demands from the bankrupt person after interdiction; those who dealt with him during this period demand payment after the interdiction is lifted. 4. The ruler sells the bankrupt's wealth and divides its price among the creditors who hold immediately due debts, leaving for the bankrupt what he needs for housing and sustenance. Deferred debts do not become due upon bankruptcy and remain his liability.

If any debts remain after the distribution of wealth, they remain his liability until Allah provides him with wealth to repay them.