"First, based on this information, it sounds like they essentially want me to show up in court to give my 'answer'."
I don't think that's a reasonable interpretation at all. Of course, I haven't seen the entire document that you've quoted. Nor do I know what the local rules say since you didn't mention your county. However, it seems to me that what has happened is that you failed to file a responsive pleading within the time provided by law, but the plaintiff failed to seek entry of default and a default judgment. Therefore, the court probably wants the plaintiff to show up and explain why he/she/it is not doing anything to advance the case to a conclusion. Whether the court appearance will be vacated if you file an answer is something that, presumably, will be addressed by the court's local rules and/or the North Carolina Rules of Civil Procedure.
"how do I file an answer and what exactly would I include in my answer?"
No one here can walk you through the process. You can contact the court clerk to see if there is a form that you can use. The better option, of course, would be to hire or at least consult with an attorney. Generally an answer involves either a general denial of all allegations or specific responses to each allegation in the complaint, together with the allegation of any applicable affirmative defenses (an affirmative defense is essentially a statement that, even if everything alleged in the complaint is true, the defendant should win because ___ (e.g., the statute of limitations has expired)).
"Has anyone been through this process before that could let me know that I'm in for?"
Millions of people have been defendants in civil cases.
"And, we've tried to work out some kind of settlement with the creditor, but they're position has been 'we want it all now or we go to court'. Can I use that against them?"
That doesn't make any sense. If you owe the money, the creditor is entitled to demand that you do what you agreed to do -- pay the debt.
