Fiqh-us-Sunnah Volume 003, Zakaat and Fasting, Fiqh 3.009A.

Section : The Insolvent Debtor.

Whoever has property must pay its proper zakah. If the property is indebted, he may first pay off his debt, then in case the remainder is enough to constitute a nisab, he must pay zakah. If he does not hold the nisab, he does not have to pay it since he is poor. The Messenger of Allah, upon whom be peace, said: "Only the wealthy are required to give charity." This hadith is related by Ahmad and al-Bukhari. The latter records it in mu'allaq form. The Prophet also said: "Zakah is levied on the rich and paid to the poor." It is all the same, whether he is indebted to Allah or to man, because one hadith states: "Allah's debt is more deserving of fulfilment."

Related Hadith(s)