How will this effect my (already horrible) credit?! Advice PLEASE!?

In my opinion, if your credit is already horrible, then you might as well settle and save some cash. It will look better if you at least settle than non-payment. By the way, is 8700 the cost with all the interest figured in? If your current, and want to pay of the balance, it should not be more than the original loan (unless you owe back payments). In the end, settle, save some money, and then work to fix your credit.