Question
If someone owes some money to me and this person is eligible to accept Zakaat, would it be permissible to offset the amount owed to me with Zakaat money I wish to discharge? In that way his debt will be settled and my Zakaat will be discharged.
Answer
It will not be permissible to merely offset the loan as Zakaat. The correct method will be as follows:
If the (debtor) qualifies as a recipient of Zakaat then you may assist him with Zakaat funds whereby he must take possession of the Zakaat funds and then utilize the same funds to offset his debt (by paying it back to you).
Once the money is received from him as payment of his debt, you may utilize that money. In this way, your Zakaat for that respective amount will be discharged and simultaneously the debtor will have settled his debt as well.
Checked and Approved By:
Mufti Muhammed Saeed Motara Saheb D.B.
References
Tamarathun Najah (Sharh Nurul Idha) pg.263 vol.2