Praise be to Allah the Lord of the Worlds.
Zakat (Obligatory charity) is mandatory and Allah blesses its giver with purification and sanctification. Allah the Almighty says, " Of their goods, take alms, that so thou mightest purify and sanctify them; and pray on their behalf. Verily thy prayers are a source of security for them: And God is One Who heareth and knoweth." {At-Tawbah, 103}
In fact, Zakat is the right of the poor in the wealth of the rich. Allah the Exalted says, "Alms are for the poor and the needy, and those employed to administer the (funds); for those whose hearts have been (recently) reconciled (to Truth); for those in bondage and in debt; in the cause of God; and for the wayfarer: (thus is it) ordained by God, and God is full of knowledge and wisdom." {At-Tawbah, 60}.
As Zakat is a right for its eligible recipient and must be handed to him/her, then the giver has no right to stipulate giving it to him as settlement of debt. It is stated in "Fateh Al-Barie, p.250", "It isn`t permissible to give Zakat to one`s debtor under the condition that the latter gives it back in exchange for that debt and it isn`t valid to settle debt through this method." If he wanted to give the Zakat of his wealth to his debtor under the condition that the latter pays what he owes him, scholars are agreed that it doesn`t avail the giver.
However, some scholars permitted a form similar to the aforementioned, and that is dropping the debt in exchange for the Zakat. This is permissible according to one opinion of the Shafie school of thought, as stated by Al-Hasan Al-Basri, Imam Ja`far As-Sadiq and Ibn Hazem.
As the debtor is an eligible recipient of Zakat, there is no blame in giving it to him according to the form mentioned in the above question, because getting the debtor out of prison is among the objectives of Sharia. And Allah the Almighty knows best.
