How True Is This?

I have heard that collection agencies buy old junk debts from creditors in large numbers and in turn pass them over to other collection agencies to collect the debt.

But haven't heard anything like you said. Others may help you more on this. I'm not an expert on this. Others may help you more.

First off CA's don't buy debts, Junk Debt Buyers (JDB's) buy debts. I'm sure each one is different in the way they handle their portfolios. I know in the case of LVNV, they will look at the accounts that are still w/in SOL and go for the judgements wherever they can. In the cases where they are out of statute, they then go after consumers credit reports and attempt to poison them up to the max 7.5 years. Once they lose the leverage of SOL and credit reporting time limits they will generally sell the debt off. From what I have gleaned over the last couple years doing this, very rarely are they going to write the debt off because they don't really want to issue the 1099 that would be the end result. See this thread about 1099's:

http://www.debtconsolidationcare.com/tax-debt/1099c-form.html

Some CA's do buy debts....some function as both 3rd party collectors and bought debt.

Very few states allow it so it is generally the exception rather than the rule.