This question was asked on BGG, but unfortunately with no answer.

The card Changeling Spell says to pick opponent's Ally, which then becomes a Challenge that opponent must immediately fight. "If you escape or are knocked out, discard this Challenge."

What happens when you defeat ally? Do you throw Ally card away or can you keep it?

Mestari said:

Allies can be killed in combat according to the normal game rules.

Winning a combat in Runebound means reducing the opponent to 0 or less Lives.

When an Ally has 0 or less Lives, he's dead and goes to the bottom of the Market Deck.

= if you have to defeat an Ally in combat, you have to kill him and so he gets discarded.

If you escape of are knocked out, you discard the Ally that has become a Challenge.

The Ally is surely lost to the opponent and it needs to be checked if he knocks out the Hero as well.

So it seems like a very powerful spell then! Thank you for answering.

So in other words, no matter what happens, the ally is lost.  The card was poorly worded, over-gunned, and seems more suitable to some other game …like Talisman, maybe.