Clothes recycling is an industry. Basically the trick is to get as good quality a supply as possible. Then you take out the best stuff to sell on to second-hand clothes merchants, and then move on the rest to the next guy. Then he will filter out the stuff he can sell second-hand in his market (say, Eastern Europe). The next guy down the line will be looking stuff for an even poorer economy. Finally, whatever is left will be sent for shredding. There are rates per tonne for all the different grades, I think.
It is worth saying that you really should have a waste collection permit to be in this business. The council should prosecute anybody in the game who does not.