NEW YORK (MainStreet) — If you've been in a car listening to the radio lately, you know that debt settlement companies are big business. With average credit card debt standing over $15,000 per household, it's not hard to understand why. But is debt settlement all that it's cracked up to be? Before you make a phone call to a debt settlement company, you need to acquaint yourself with the whole truth about what they're offering.

Settled Debt Is Income...

The first, and perhaps most important, thing that you need to know about settling debts is that anything that's settled is money earned as far as the IRS is concerned. "It's considered income and you get a 1099 for it," says Roxana Epps, a debt settlement counselor with Take Charge America. "You have to report the income on your tax forms. The taxes you pay as a result of negotiating that debt can offset the amount you actually saved."

What's more, your debt settlement company might well charge a fee for what they saved you. That's another way that you're going to not save as much as you might think by settling your debts. Before you go any further, you need to evaluate how much you're actually going to save by settling your debts.

Debt Settlement Can Negatively Impact Your Credit...

"When you're not paying on your debt, that gets reported," says Epps. "When you settle a debt, it's going to be reported as debt not paid in full." That's not going to look good when you go to apply for credit in the future. And while it might be the only option you have if you're facing judgments and liens, debt settlement is really only an option when you're in pretty dire financial straits.

"The problem with debt settlement is that it puts the consumer in the position of not agreeing with the terms of their original loan," says Randy Padawer, a consumer education specialist with LexingtonLaw. "They borrow money, then pay it back on different terms. As a strategy, that's terrible. As an unfortunate last resort to certain life events, it's something individuals should and must consider from time to time."

Padawer also points out that you're better off negotiating directly with a third-party debt collector over the phone. That's because basically every collection agency is buying debts for pennies on the dollar. "They're almost always willing to engage in serious negotiation, especially if the debt is very old," he says. When negotiating in this fashion, you always want to build into the negotiation a request that the negative collection be removed from your credit reports as a part of your agreement. Get it in writing before any money changes hands.

"When you enter into these settlements and it's not properly documented, it can be considered an initial payment," says Epps. "If you enter into the agreement over the phone and give them money before you get it in writing, at that point you could still owe the entire amount. They can document your payment as an initial payment." Epps also warns that when you deal with third-party agencies that are particularly unscrupulous, they might just take your money and not pay on those debts.

"The bank is almost certainly not interested in negotiating with you at all," says Padawer. "They're interested in you paying back the money you borrowed. In almost every case they won't even engage you." What's more, even when you do negotiate a settlement, it will severely negatively impact your credit score and remain on your credit report for up to seven years. "During that time you won't qualify for any credit, so don't expect to buy a house or a car any time soon," Padawer adds.

So when does debt settlement make sense? "People might be facing legal ramifications," he says. "They might be going to court. It might be advantageous to settle at that time." But it might also be riskier. It's a difficult call to make, but it gets a lot easier when you have all of the facts in front of you.