Question 881) - What do you mean, "the debt or the collateral, whichever is the lesser"?

A: If the collateral is destroyed in the hands of the Murtahin and its value equalled the debt, then legally the Murtahin has had his debt fulfilled. If the value is less then the debt, that amount is deducted from the debt and the Murtahim claims the remainder from the Rahin. If the Rahn is more than the debt, then the excess is treated as a "trust" with all the applicable laws. Thus if the collateral perished in the hands of the Murtahin, he has no responsibility for the excess because there is no claims for responsibility for trusts. The debt is forfeited in lieu of the value of the Rahn which was destroyed in the creditor's hands.

~ al-Quduri ~