FOR THE GHARIMEEN OR DEBTORSThere are two types of people who can be in debt. 1. People who incurred debts due to their effort of reconciliation between two differing parties. 2. People who owe money to a creditor due to personal needs. They borrowed money for their own personal needs. Zakaat money is used to pay off debts but these people are not living in luxury, they are living a normal life. For example, someone who reached a state of insolvency due to job loss, incurred debts by being allowed credit for the bare essentials.
Masaa'il:Zakaat money is not given to those whose debt is due to sins and acts of disobedience such as gambling, getting involved in interest (riba) transactions with banks or shark loaners except if the sinners repent from their sin and give assurance that they will not return to this sin. Otherwise, it is considered as cooperating upon sin and transgression by feeding an addiction or by encouraging people to deal with interest. (See Sharh al Mumti’ ‘ala Zaad Al Mustaqni'/page235) As scholars mentioned, there must be clear and reliable evidences that those sinners repented before giving them from the zakaat funds to pay off their debt. Generally speaking, the debt must come from a halal source. This is why claimants must show some evidence regarding the nature of their debt.
Zakaat is given to this category on the strict condition that these individuals do not have any money on the side which they could use to pay off their debt themselves. It is not permissible to use the zakaat funds to pay off the debts of someone who passed away. Sheikh Al Uthaymeen "Majmoo' al fataawa" vol18 page 335/336. The reason behind it is that Allah’s messenger never paid off the debts of the deads with the zakaat money, rather they were paid off with "al fay" (spoils of war obtained without fighting due to the enemy fleeing the combat zone). He also mentioned that people who are alive from the fuqara, the masaakin, the ghaarimeen and those fighting in Allah’s cause have priority upon those who passed away. Paying the debtor or the creditor? If the debtor is trustworthy and serious about paying off their debt, then it is better, without doubt, to give them the zakat money directly in their hand so that they deal with the matter themselves without feeling any shame or blame in front of people. However if it was feared that the debtor would waste the zakat funds, then we would not give them, rather we would give the zakat money directly to the creditor to pay off the debt. (See Sharh al Mumti’ ‘ala Zaad Al Mustaqni’/page235)