Settling your debt can seem like a way out of a bad financial situation. In debt settlement, the creditor whom you owe money to agrees to allow you to make a payment (either a single payment or a series of payments) for an amount that is less than the total you actually owe. As long as you complete the payment or payments on time, the remaining balance is forgiven. This allows people to avoid going into bankruptcy or simply walking away from a debt and dealing with a charge off on their credit (although debt settlement can be somewhat damaging to your credit score as well)
The major problem, however, is the debt settlement taxes issue. When you have debt forgiven, that is considered by the IRS to be income. Since it is income, it must be reported, you will receive a 1099 and the IRS of course takes a piece of it. There really is, unfortunately, no way to avoid this either under the current law since you must be taxed on income. You simply have to plan for it and be prepared to deal with the tax bill.
To understand exactly what to expect from the IRS and otherwise during the process of debt settlement, you should consider speaking to an experienced lawyer. Your attorney can help you to explore your options and to understand exactly what your obligations are when it comes to settling debt.