Generally, the system works as follows:
The buyer makes a claim that the item is not as represented. The seller then can make their case and attempt to come to a mutual agreement with the buyer. If no mutual agreement is forthcoming, Paypal makes a determination of the merits of both parties' arguments, and decides how to resolve the matter. In 99% of all cases this means that they decide in favour of the buyer. At this point they reclaim the value of the disputed item from your paypal account and then place it in a sort of non-interest-earning escrow account. The money does not however get refunded until the buyer proves with a tracking number that the item has been shipped back to the seller. Once the buyer "proves" that they have returned the item to the seller, they then refund the money from the escrow account.
I have heard of many accounts of threats of sending items to collection, but have never heard of anybody ever having paypal actually go after them without there being absolute certainty that Paypal could prove that the seller was at fault. In your case, until you do not yet have the item back in your hands, they would be foolish to chase after you.
Now for some fun facts:
a friend of mine sold a beautiful Motta track bike to a coolio hipster in Los Angeles. The hipster received the bike, built it up and like so many first time fixed gear riders ended up riding head on into a kerb on his first outing. Being a real track bike, it had fag paper clearances and all it took was this one impact to bend things enough to bring the front wheel into contact. Well not wanting to admit that he was an aXXhole, he went through paypal to get a refund saying that the bike was defective prior to shipment. Luckily the seller had 72 date-stamped photos showing every possible angle of teh bike and demonstrating that the bike was 100% ok prior to shipment. Notwithstanding this proof paypal agreed that the buyer could return the bike to the seller for a complete refund. Then, instead of shipping tha actual bike, he simply took a photo and sent that by registered post, giving the tracking number to paypal. Paypal upon receipt of the tracking number refunded his money. Now the seller was out of his money, had a hold put on all funds in his paypal account (which it just so happens were more than double the amount of the bike), but also did not have the bike either. He ended up going to the authorities and opened a case for mail fraud against both Paypal and the buyer and within 24 hours had his money for the bike credited to his account, had the block removed and a letter of apology. I always did wonder what happened to the hipster.
