Using interest to reclaim debts
13-3-2004 | IslamWeb
Question:
For some years I borrowed some money for somebody. I gave him one year to pay back the money, but he didn’t keep his promise. Of course he was able to pay back, but instead he spent his money for girls and other trivialities. So I decided to insist that he to repay my money, as I was sure that he is not a suitable person to forgive. Years went by, five years at least, and he still didn’t repay the money. So I had an idea: in my bank every year I receive an amount of interest, and of course I don’t accept that money, instead I give it to needy Muslims. My question is: can I take the amount of money that I loaned to this person from the interest I receive, considering it as a "Sadaqa" for this person. At the same time I’ll forget this borrowed money forever? Please let me know if it is possible to get back one’s money by way of getting that interest and at the same time void the debts of those people.
Answer:
All perfect praise be to Allaah, The Lord of the Worlds. I testify that there is none worthy of worship except Allaah, and that Muhammad 
is His slave and Messenger.
No doubt that bank interests are Riba, hence illegal earnings. The legal way of getting rid of interest money is to give it to the poor, needy persons, or to spend it in some Muslim public interest. But its owner does not have the right to possess it or benefit from it unless he is poor himself. In that case, he should not exceed the minimum necessary that satisfies his need and anything that remains should be spent on the people specified earlier.
In addition, it is unlawful to deposit your money in banks and institutions that deal with Riba (interest and/or usury) unless there is no other way to avoid that.
As for your idea of having your loan to this man paid from the interests you get from the bank, we think that this is lawful provided that that man is now destitute. In that case, you only take the due amount and get rid of what remains.
In fact, the Muslim scholars state that it is lawful to pay on behalf of an indebted person using the Zakat money directly to his creditor without letting the indebted person possess the Zakat share.
But if paying the debts of this poor person will help him spend his other belongings in what is unlawful, then you should not pay his debts. Muslims should help one another in righteousness and good deeds only.
Allaah Knows best.