What is debt settlement, and what are its risks and tax consequences?

Debt settlement means negotiating with creditors to accept less than the full balance, often through a for-profit company you pay into while it withholds payment from creditors to pressure them. The risks are serious. Settlement usually requires you to stop paying, which tanks your credit, triggers late fees and collection calls, and can lead to lawsuits. Companies charge fees of 15–25% of the enrolled or forgiven debt, and there's no guarantee creditors will settle. Critically, forgiven debt over $600 is generally treated as taxable income – you'll get a 1099-C and may owe income tax on the amount written off. Settlement can make sense for someone already in severe hardship who can't repay in full, but it should be weighed against credit counseling and even bankruptcy. Understand the credit and tax fallout before signing up, and be wary of any firm promising guaranteed results.