be to Allaah.
narrated in al-Saheehayn from ‘Abd-Allaah ibn ‘Abbas (may Allaah
be pleased with them both) that the Messenger of Allaah
(peace and blessings of Allaah be upon him) said to Mu’aadh ibn Jabal,
when he sent him to Yemen: “Teach them that Allaah has enjoined upon
them zakaah on their wealth, to be taken from their rich and given to
their poor.” The Prophet
(peace and blessings of Allaah be upon him) explained that zakaah is
something which is to be taken and given, so on this basis it is not
permissible to let off someone who owes you money and count that as
zakaah, because letting someone off a debt does not involve taking and
al-Islam mentioned this issue and said: letting someone off a debt does
not relieve one of the obligation of zakaah, and there is no scholarly
dispute on this matter. But you can give this needy person some of your
zakaah and he can meet his needs using what you give him as zakaah;
and Allaah will help him to pay off his debt in the future, in sha Allaah.
Fataawa Manaar al-Islam by Shaykh Ibn ‘Uthaymeen (may Allaah have mercy on him), vol. 1, p. 309-310.