Vast amounts of donated clothes are turned into rags or exported to Third World countries. Whether all that transportation is actually greener than landfilling them nearby is an interesting question I’m not able to answer.
Here is a thread I started a couple years ago about the supply / demand side of castoff reuse. I don’t recall that we came to any great conclusions, but it was an interesting conversation with lots of good info shared. There was at least one post & cite about clothing specifically.