The following question and answer by Sheikh Yusuf Talal DeLorenzo attendees of the Dow Jones University Courses on Islamic Investement.
Question:: Can riba money be used to pay off a riba loan? If so, would this be considered purification of wealth?
Answer: It was explained in the section on Purification (Lesson Six, Section Six) thatincome from interest must be given away, and that? "as a general principle, sincethe money being distributed represents impure income, it must not be used in a way thatwill benefit the one distributing it." Then, in accordance with this principle, itshould be clear that spending such money to pay one?s bills, regardless of whether theseinvolve interest or not, is simply not acceptable. This is because if you pay your billswith this money, you will benefit from doing so because you will not need to spend ofyour halal earnings to pay those bills.
For the same reason, if you gift the money is to a charity, it may not be written offfor tax purposes because that would benefit you. For the same reason, you should not expectto earn the pleasure of the Almighty by spending such money for charitable purposes. Thisshould explain why money from impure income may not be used to discharge one's Zakahresponsibility. Finally, the most that one can hope for in this regard is that byseparating the money from one's lawful earnings, and then spending it in charity,one may gain the forgiveness of the Almighty for having earned the money in themanner that it was earned.