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You're best contacting Marketo Support to fix this.
Check your firewall settings. We had the same issue, and found out from our IT team the new Microsoft Outlook settings had quarantined all emails coming from email@example.com for some crazy reason.
For creating a new user with the same email after deleting the old one, just wait 15 minutes or so. If I remember there's a back-end cache that takes a little time to clear before it recognizes that the email is no longer in use. If the password reset still doesn't work after that, you'll probably want to contact support, and check with your IT team to see if the email is getting caught it a quarantine or something.