I'm curious what other people do. I helped Madenach on my first play-through, and he was like, "Thanks, but my guys are still gonna attack you on sight." My second and third play-throughs, I killed him. Thonar Silver-Blood at least arranged a pardon and gave me my stuff back. Granted, it was his crooked guards who arrested me and took my stuff in the first place, but it's more than Madenach would do for me.
As a side note, while in prison I got around the lack of decent weaponry by going werewolf on their asses. Good times.