Is it permissible to give zakat to an insolvent merchant who owes us money, on condition that he repays it to us after he takes possession of it and agrees to that?

It is not permissible to waive a debt owed by a debtor and count it as zakat, nor is it permissible to give him zakat on condition that he uses it to pay off his debt.

However, if the poor person is given ownership of the zakat money and disposes of it as he wishes, then uses it to pay off his debt, this is permissible and counts as zakat. This is what the scholars have agreed upon. But it is not permissible to make this a condition for him, because one is not allowed to favor anyone when it comes to zakat.