It would seem your are kinda screwed. The trouble is they can make a hassle for you right or worng. Its standard business practice. If they annoy the crap out of you they get their money.
I had a similar smaller instance where a collection agenciy tried to collect money on a 5 year old debt I didn't owe. The put a blip on my record and started calling. I found out who it was got an address and started to document everything.
Start here;
http://www.ago.state.co.us/CADC/PDF/cabrules.pdf
More good info here:
http://www.ago.state.co.us/CADC/CADCmain.cfm.html
Now regarding the certified letters, no, they do not have to mail certified letters, but if you dig in and fight, they are going to have a hard time fighting you becuase they cannot prove they even tried to contact you.
First you need to decide your resolve on this, these folks thrive on just wearing peaple out. You cannot fight part of this debt, you need to take on the whole debt with the intention of settling (but they have no need to know that).
First, reference the Colorado Consumer website above. Write a letter referencing the actual regulation numbers and inform them you are disputing the entire debt. Also, IAW with law, tell them they are no longer to contact you regarding it (very legal). Send it Certified mail. Now you have proof and they don't. In fact all correspondence needs to be certified mail.
Next, if the collection is a law office or the rental compnay, ask for the collection liscence number. File a complaint against them for unfair practices. Cite they made no attempt, the verbal agreement, and the legal fees. You will probably lose, but now you are on the offense and they are on the defense.
Then offer to pay the original 1400 and get a legal notorized document saying that this is the end of it. You are on the downside right now and they will continue to bully you becuase they can get away with it. Once you establish yourself as a fighter they are going to want to get rid of you as soon as possible and start with the next guy. You just have to be prepared for some hassle.
If this shows up on yours/her credit report, you might get an insurance hike and some other stuff, deposits for utlities and the like. But once you formally refute the collection, you can also forward the letter to the three credit agencies (certified). They are required by law to verify this with the agency that owns the debt. That compnay only has 60 - 90 days to verify it. They usually can't becuase the section that calls you is different and the pure buracracy of the company bust the window. Then your send another certified letter to the big 3 insisting it be removed and make sure it is. In the middle of this they might sell this to a crappy more agressive collection agency and you wil need to to the above stuff again. But when they start ignoring your request to stop calling, they quickly get into a lot of trouble, espcially in Colorado. I mean like peaple get fired and compnaies get fines kinda trouble. This is where documentation comes in.
Its a lot of work, a lot of documentation and some payout on your part, but tencity wins in this battle.
Good luck.