In the event a creditor settles a debt and the amount is $600.00 or greater, the Internal Revenue Service (IRS) considers the forgiven amount to be taxable income. In the event a creditor forgives a debt it is the creditor's responsibility to file a form 1099-C with the IRS and also to provide a copy of the 1099-C to the consumer. Sometimes a collection agency will file the forms for the creditor; however, it is the creditor responsibility to notify the IRS of the forgiven amount.
For more information on debt settlement see http://www.askdoctordebt.com/16757-Debt-Settlement. You may also want to discuss your tax issues with an account or tax professional.