Gees, when you drove the car off the lot it lost 3 grand in value LOL.
I've got around $5k in motor (the custom motor, not my $2500 HO crate engine) in my car, not including the supercharger setup, which puts me to almost $8000 total.
I know it doesn't make sense to buy a $2500 motor, but, it's a zero mile unit that will keep the car alive for about 10 more years (low estimate).
Sounds to me like you had a bad head gasket or blowby on one of the cylinders, causing you to burn the oil. The knocking you heard was either a rod bearing (most likely answer) or a crank bearing. Too bad, it was a nice car I'm sure.