The agreement was signed by a federal bankruptcy judge in Virginia and bars debt collectors from filing negative credit reports or threatening to file such reports against former customers, Montana Attorney General Steve Bullock said.
Bullock filed a lawsuit in January against the debt collection agency used by Movie Gallery. After Montana filed the lawsuit, the liquidating trustee of the video retailer negotiated the agreement with Montana, 49 other states and the District of Columbia, Bullock spokesman Kevin O'Brien said.
"In today's economic environment, one black mark on your credit report - even one that's illegitimate and reported by an irresponsible company - can prevent a hardworking family from buying a new home," Bullock said in a statement.
Movie Gallery, which also owned Hollywood Video, was once the nation's second-largest video and game rental chain with more than 4,000 stores in the U.S. and Canada. It filed for bankruptcy February 2010 as its retail sales slipped against Netflix's mail-order business, DVD kiosks and Internet-based services.
Movie Gallery hired a company called National Credit Solutions to recover $244 million in fees and charges from 3.3 million customer accounts across the nation, including video late fees and charges for replacing lost movies and video games.
Bullock alleged in his lawsuit that National Credit Solutions filed negative credit reports without informing the customers, never gave them a chance to dispute the fees then tried to charge them exorbitant fees on top of what they reportedly owed - more than $300 in the worst cases.
National Credit Solutions' managing member Brett Evans said then that the company did nothing illegal and filed the negative reports with credit reporting companies under the direction of Movie Gallery.
After the lawsuit was filed, National Credit Solutions requested that credit reporting companies TransUnion and Experian reverse any negative credit reports initiated by the debt collector.
Movie Gallery trustees contend that all their actions have been appropriate and in line with the law and customer agreements. Under the agreement filed Thursday, they still will be able to pursue valid debts under certain conditions.
The defunct company must make sure all negative credit reports have been withdrawn and may not submit or threaten to submit any more reports against former customers. It also agreed not to collect any fees or interest in addition to what is owed and limits the type of fees that can be collected.
O'Brien said the attorney general's office is pursuing a separate settlement in the lawsuit with National Credit Solutions.
Movie Gallery operated 24 stores across Montana when it filed for bankruptcy, and the company had been trying to collect against 12,325 customers, Bullock said. His office launched an investigation in December after receiving 15 complaints against Movie Gallery.