All perfect praise be to Allah the Lord of the Worlds. May His peace and blessings be upon our Prophet Mohammad and upon all his family and companions.
It is imperative to determine the method through which the debtor had managed to get the money:
If he (debtor) had stolen the money or taken it by force, then it isn`t permissible for you (Creditor) to keep it; rather you must give it back to him so that he gives it back to its rightful owner. If he took it by means of an illegal contract, such as a usurious contract, then it is permissible for you to accept his repaying your money. However, we prefer that you would delay collecting your money from him so that he could give the money back to the bank in order to decrease the usurious amounts due on it.
Moreover, you (Asker/creditor) should advise him and clarify the punishment for eating up ill-gotten money and that it is one of the major-grave sins. The evidence on this is that Almighty Allah Says {What means}: "O ye who believe! Eat not up your property among yourselves in vanities: But let there be amongst you Traffic and trade by mutual good-will: Nor kill (or destroy) yourselves: for verily God hath been to you Most Merciful!" {An-Nisaa`, 29}. And Allah The Almighty Knows Best.
