Why not attempt to dispute the debt directly with the claimant first?
I am licensed to practice law in Wisconsin, as well as various Federal District Courts. No attorney-client relationship exists, and you should not rely on my answer as legal advice in your specific case.
What is Palmer and Associates' relation to you or Sears? Does the letter say how they came to the $500 figure? Where you arrested as a consequence of this incident?
The more details you can tell us about this case, the better.