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﴿ فَاسْأَلُوا أَهْلَ الذِّكْرِ إِن كُنتُمْ لَا تَعْلَمُونَ ﴾

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Issue: If I have wealth subject to zakah and I have a poor debtor whom I am pursuing, is it permissible for me to forgive his debt and count it as my zakah?

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The Shaykh : If I have wealth subject to zakah and I have a poor debtor whom I am pursuing, is it permissible for me to forgive his debt and count it as my zakah?
The answer is no, because zakah is giving and bestowing, not forgiving. If, for example, I have forty thousand and I am pursuing this poor man for one thousand riyals, and I have forty thousand, how much is my zakah? I am pursuing this poor man for one thousand riyals. If I forgive the thousand from the poor man, does it suffice for my zakah? No, I must give my zakah, and it is not permissible for a person to forgive a debt he has on a poor man and consider it as his zakah, because forgiving a debt as zakah is considered choosing the bad to get rid of the good. And Allah Mighty and Majestic said:
And do not aim toward the defective therefrom, spending [from that] while you would not take it [yourself] except with closed eyes ولا تيمموا الخبيث منه تنفقون ولستم بأخذيه إلا أن تغمضوا فيه
[Al-Baqarah 2:267]
Because every person knows the difference between money in his hand, which he can dispose of as he wishes, and a debt he has on a poor man, which may or may not be paid.
Source alathar.net

The Arabic text is copied verbatim from the original source, without any edits.

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