As you have just seen, you will get a lot of money back for your car. Volkswagen was not treated kindly, and American owners will be offered a very, very generous amount of money. This kind of an opportunity won't likely happen to you again, so take it.
Others will recommend a Honda Fit, Used (Gen 2) Prius, Used Scion xA, Pontiac Vibe, etc. (You get the picture?). Evaluate your needs, look at what you can afford, and narrow your options from there. Don't take on a payment. Don't lease anything. Drive only what you need to serve you well.
As for the insurance black mark, I had one a few years ago, and over time my rates have gone down. You absolutely, positively want to shop around for the lowest rate with the minimum coverage you need. If you own something worth $6000, what's the point paying out the nose for insurance that you'll almost never use. Just by paying off a car loan, and lowering my coverages, I dropped my insurance rate 60% last year.
