Bogus PayPal Smart Connect Account

A year ago, I received an application for a Pay Pal Smart Connect credit account. I threw it out. A month later, I was sent a bill for $25.00 from merchandise I supposedly bought from a company in China. I immediately sent a dispute to Pay Pal, as I do have an account with them in which I use my credit union visa card. They wrote back and said someone would be contacting me, but that they saw no such activity or opened charge account in my name. As far as I know, they did not call. One month later, I receive another bill. This time for a few HUNDRED dollars. I immediately wrote to the person who had responded to my first inquiry expressing my anger that this was the account that I never opened and informed them of; AND that this account was still opened and being used. Shortly after this, I discovered that several firefighters from my credit union were having the same issue. I received a statement where charges were credited sometime in January and then another in March where more charges appeared. I ignored it this time. Correspondence stopped and I assumed this was because Pay Pal became aware of the fraud since it happened to an entire group. NOW, I am applying for a personal loan and it is showing up on my credit report. The moment I sent proof that I had contacted Pay Pal, a collection letter from First Source was sent to me saying I must respond to them in 30 days or pay this in full. Before I call, any advice???