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I had sort of the same situation. I canceled an account with AT&T before my contract expired and was charged a cancelation fee of $200. Within about 8-9 weeks it was sent to collection (really fast). I used my last AT&T bill to make payment in full, they accepted it. Months later I check my credit report and still see the collection account. I disputed it with Equifax and it comes back as verified. I then contact collection agency and got into a heated argument about how I couldn't have paid AT&T because it was in collection. I then call AT&T and they check the account is paid in full and I tell them that "somehow" this agency thinks it's in collection and I threaten legal action. Eventually agency removes account. I'm not sure if this helps, but if you can trick AT&T into accepting payment it may prove to be beneficial.
I would follow their advice and pay the collection and then dispute it. The initial dispute will come back as verified, but a second more thorough explanation dispute will probably remove it and the agency will most likely not report on an account that is paid. Just my experience.
AT&T can be vicious! I dealt with them years and years ago!
Pay AT&T directly! If she can still see the account, she can collect payment on it. Tell her you never deal with collection agencies!
Send a verification letter to the collection agency.
I just paid off a medical bill that was supposedly sent to collections months ago. Every month, I made a small payment directly to the medical office. Every month, they told me to deal with the collection agency. Every month, I said no. I owe you the money, I pay you. Yesterday, I finally paid it off!!! Weu weu!! (Btw, I never received a letter from the collection agency. The medical office was being difficult because they did not appreciate, or want to accept, tiny payments each month. The same office sent my husband's account to collections. Same story. I still called them up every month and made payments. A collection agency did send a collection letter on his account. I sent them a verification letter and that was the end of that!)