Debt settlements can be a relief for individuals struggling from a variety of large debt.

But don’t relax too soon.

As the lawyer’s saying goes: “always get it in writing”:

The first rule when settling a debt for less than the full balance owed is to get the settlement agreement in writing. The agreement should state that by paying the settled amount, the debt is paid in full.

Step two: just because you’re out of the woods with the debt collector doesn’t mean you’re out of the woods with the IRS:

the collector is required to issue a 1099-C tax form for the forgiven amount of the debt. The IRS considers debts that are forgiven to be taxable income.

By the way, the taxable income is the forgiven debt amount. If you choose to settle a $20,000 debt for $2,000—you can be taxed on the $18,000 forgiven debt.