The 28-year old winger is out of contract at St Andrew's but it is believed that the Brum may trigger a clause in his contract which keeps him there for a further two years.
But with Birmingham being relegated from the Premier League, McFadden may want out and could welcome interest from Celtic who have been alerted of his current situation.
McFadden has not played since September after injured his knee but Birmingham boss Alex McLeish has made it clear that the former Motherwell and Everton man will not be leaving the West Midlands for nothing.
"We've got a two-year option on James. That's the situation," he said recently.
"And I wouldn't think that we would be letting a guy like James McFadden walk out of here free."