If the mortgage debt is less than the value of the mortgaged item in a bankruptcy case, how is the item liquidated?
General Chapter
Al-Mughni
Book of the Insolvent (Bankruptcy)
Primary text
If the mortgage debt is less than the value of the mortgaged item, the entire item is sold. The mortgagee's debt is settled from the proceeds, and the remainder is returned to the bankrupt person's remaining estate, shared among all creditors. If only a portion of the item is sold, the remaining part must also be sold to satisfy the creditors, and the original seller cannot exercise the right of rescission over it.
Supporting text
Al-Qadi maintains that the seller has the right of rescission because the item remains his original property, and no third party's right is attached to the remainder. However, our position is that since the seller did not find his property in kind, he cannot reclaim it, just as if the debt had consumed the entire value. Al-Qadi's view is considered outside the established doctrine because the destruction of part of the sold item prevents rescission, and thus the loss of part of it through sale also prevents it.