Settling vs. Paying

I have been in a debt counseling program since 2/2004, and have less than a year to go. One account, however, has been charged off by the original credit company, and has switched companies several times. The original debt was $3200, and I have paid nearly $2900 on it, but they are now saying that I have additional $1500 in interest and fees so I now owe about $1900. They offered me a 65% settlement on this account, which I could possibly afford. The original Credit card company said that settling would be a good choice because the debt has been reported as delinquent since it became past due, and settling would allow them to show it as current, which would help. However, my credit counseling agency said that I might receive a 1099 (I swear that is correct) and that I could be held liable for the difference between what I owed and the settlement at the end of the year, and that settling is a bad idea. I am rather unhappy with my credit counseling agency at this time for many reasons, and wonder if taking all of the accounts back myself and stopping the repayment through the agency would hurt me. Is settling a bad idea? Any advice is welcomed. Thanks.