The awareness of the concept of the “Circular Economy” is motivating scientists to convert drinking water treatment plant by-products, which are based on aluminum waste, into a valorized material for wastewater treatment. Alum sludge from a local waterworks plant in Egypt was collected and dewatered using chitosan-coated magnetic nanoparticles. The role of the conditioned sludge in wastewater treatment was then examined. Chitosan (Ch) augmented with magnetite nanoparticles (MNs), labeled as ChMNs, was prepared by means of a simple co-precipitation route with mixing ratios of 1:1, 2:1, and 3:1 of chitosan and magnetite nanoparticles to form the ChMN catalyst. The ChMNs were shown to beneficially enhance alum sludge conditioning and dewaterability. The conditioned and dried aluminum-based sludge (AS) loaded with ChMNs was then used as a source of Fenton’s catalyst for Synozol Red-KHL textile dyeing wastewater. The characteristics of the AS-ChMN sample were investigated using Fourier transform infrared spectroscopy (FTIR), transmission electron microscopy (TEM), and scanning electron microscopy (SEM). The photocatalytic activity of the AS-ChMN composite was assessed by examining its diffuse reflectance spectra (DRS). Response surface methodological analysis was applied to optimize the operational parameters in order to reduce the use of chemicals and improve dye oxidation to form a complete (99%) dye oxidation strategy. The experiments demonstrated that the optimal operating parameters included doses of 1.5 g/L and 420 mg/L for AS-ChMNs and hydrogen peroxide, respectively, as a source of Fenton’s reaction at a working pH of 3.5. Kinetic and thermodynamic analyses for potential full-scale applications were conducted, showing the reaction to be exothermic and spontaneous in nature and following second-order reaction kinetics. Hence, the novelty of this work lies in the introduction of conditioned and dewatered alum sludge waste as a photocatalyst for textile dye effluent oxidation, which could be considered a “win–win” strategy.