You can not even pay it off to get the phone to work. I take it you took the sellers word the device was good to go. Lesson learned here, I am sure. You will now need to find a legitimate seller or do what I do, just purchase from a VZW corporate store.
The full price for an iphone at VZW does not look so bad now.
With craigslist purchases, I always recommend meeting the seller at a Verizon store so that you can verify the ESN/MEID before actually paying for the item. Saved my brother $250 on a phone purchase (blacklisted/stolen?) about 3 months ago using this method.
They may wipe it clean, but the bad ESN/IMEI will still be in VZW databank. If a new ESN is assigned that is not in the approved databank, they still can not activate it.