Praise be to Allah.
It is permissible for a person to give zakaah to someone who owes him money but cannot pay him back, so long as he does not stipulate that he must give it back to him.
Al-Nawawi (may Allaah have mercy on him) said in al-Majmoo’ (6/198): But if he gives him zakaah on condition that he gives it back to him in payment of his debt, the giving is not valid and the zakaah is not waived, according to scholarly consensus. End quote.
Shaykh Ibn ‘Uthaymeen (may Allaah have mercy on him) was asked: is it permissible for the one who is owed money to give zakaah to the poor person who owes him money on condition that he give it back to the giver to pay off his debt?
He replied: If you are owed money by a poor person and you give him your zakaah, there is nothing wrong with that even if he gives it back to you later on, but stipulating that he must do that is not permissible, because if you do that, then we know that you only wanted to do that so that you would get back your money that is owed to you of the poor person, and it is not permissible when paying zakaah to serve one’s own interests or the interests of anyone else. End quote.
Majmoo’ Fataawa (18/378).
And Allaah knows best.