Product: Debt collection

My name is XXXX XXXX and I am seeking advice on what to do about the following situation. 
Back in XXXX we were stationed in XXXX, XXXX, because of all the issues of moving furniture and weight restrictions we decided we would sell our furniture and buy when we got back to the states.. Early XXXX we were re assigned to XXXX XXXX in XXXX XXXX Texas, The kids needed furniture so we decided to go to a local furniture store ( XXXX XXXX ). The sales person was very nice and helped us pick out the perfect set for our need at the time. The sales person informed us of a credit company they were working with had a deal where we would not have to make any payments for 24 months. The only thing was that the credit company they were going through only allowed a {$1000.00} limited so we had to get XXXX credit cards totaling XXXX. We agreed and in a week we received our furniture and everything was great. Since we were not new to getting credit, we understood that interest rates would accumulate, so I called the company about a month later to ask about my account information and mailing address so I could send my payments and not accurate interest rates. The customer service person at XXXX XXXX informed me that they were not allowed to give out my account number over the phone and that they would send me a bill soon. A month later I called again and they still refused to give me my account number and stated the same thing that a bill would arrive soon and that I could start making payments. To make a long story short I never once received a bill. As time went on I knew they would send me a bill once I started to accrue interest. Well Instead of getting a bill I got a call from the collections dept at XXXX XXXX offering a settlement. I explained to them what was going on and we came to an agreement that I would just pay it and get it over with. The last time I heard from XXXX XXXX was XXXX XXXX, XXXX. In XXXX of XXXX I get a letter from Portfolio Recovery telling me I owed them {$970.00}. I immediately called XXXX XXXX and had them send me a letter stating that I had paid off the loan and that I did not owe anything. They agreed to send me the confirmation letter. Seven days later I email XXXX with the statements and a letter of XXXX balance. XXXX does their investigation and confirms that I still owe XXXX, and I am stumped. XXXX informed me that the XXXX that I had paid to XXXX was for the XXXX credit card and all the interest that was accrued. At that point I asked them to send me all the statement so I could see for myself. I expect to receive the statement early XXXX. 
Well since we had gotten back to the States my wife and I have been working hard to get our credit scores up so we could buy a house. Two months ago my credit score was finally above the requirements for a VA Loan, so we decided to put a down on a new home. Just as we were about to settle on the mortgage this collections comes out of nowhere. We have n't gotten a rejection letter from the bank yet but they were asking about a late payment I made back in XXXX, I am pretty sure they are going to want to know how I thought I was going to get a mortgage with a collections company on my credit report. 
I have taken out some loans in the past that had some bad interest rates and but this is a whole new level of sneakiness that I just did not see coming. 
Any Advise would be greatly appreciated as I am at loss for what to do. I 'm not sure if I have any legal rights or if I just pay this and wait the 7+ years for it to come off my report. 
Thank you XXXX XXXX