If I got a collection letter, can my credit history be harmed right away?

Give the papers to your auto insurance company.

First, reply in writing that you dispute the debt and that you caused any damage. Warn them against damaging your credit. Next, call your car insurance agent and let them handle the matter unless it looks like your insurance rates will increase.

Tell the collection agency that the other person withdrew their lawsuit, you dont owe the money and not to call you again. Note the date, the persons name and tel number as well as the companys name they work for. The Fair Debt Collection Act says they can't bother you again or they will be subject to fines of up to $1k per violation. They are not creditors until and unless they get a judgment against you, and they should not report anything to the credit bureau until they are a legitimate judgment creditor. I would also call your insurance company and tell them they are out there and let them handle their claims. The insurance industry has mechanisms set up to deal with each other when they're trying to get money out of the other.

Firstly, request debt verification from the agency that shows you owe the company any money. If you show he sued and lost it is pretty definitive that you don't owe the money. Secondly was the lawsuit dismissed with or without prejudice? After small claims it is not an appeal but essentially a do-over where the small claims judgment is thrown out and they do it all over again and you're allowed an attorney. It sounds like it was with prejudice since trial had started and the judge was going to rule against him. If it was with prejudice he has lost his suit and cannot refile. Also about his subsequent reporting to his insurance company. You could sue your neighbor for defamation. Contact a local attorney.

If you scratched his car(and I sense you did and you think maybe he cant prove it or the bill is higher than you want to pay) pay the bill and shut down this court nonsense. Call your insurance carrier and let them know what you did and let them take care of it.