Bicycle Tutor

Hi all... first time poster here.
I am definitely not a bike no it all... at all. I have been trying to teach myself slowly because I have an old heavy schwinn varsity and I was going to try and build myself a new fixie/or re-haul the varsity this winter.
Problem is I don't think I can wait that long. See, I deliver for a well known sandwich shop chain and I need a bike fast. I have already put some money into my varsity, but i think I have grown sick of that...Or maybe not.
I cant even begin to tell you the technical name of the problem that is occurring. BUT i can explain it! When I'm pedaling it is making creaky noises so i thought no big deal...it's rusted. So a couple days later I was pedaling along and it seemed like the cranks weren't moving the chain wheel. So I was pedaling but nothing was moving. My pedals at this point also can not go backwards like they once could without a heavy push unless I am moving, then it is a bit easier. So it seems like i could ride this, if i want to hear loud noises and get a real work out..but I don't think I want that.
So my question: First off what is the problem? and is it worth fixing on a heavy varsity if I want to turn around and re-haul or built a lighter bike come winter?
all comments and help are appreciated... thanks, zak

Hmmm....
What "is not moving" when you pedal forward? the wheel? So, when you pedal, the chain (and rear sprockets) move, but the wheel stay still?
What type of bike do you have? Internal gear hub or a derailleur?
Is the drive train set up correctly?
First guess: Either re-check the gear setup or the freewheel (derailleur equipped bike) or internal hub gear might be shot.
You have two options:
1) Buy new bike. This is the expensive-but-no-worries-option.
2) Fix the stuff that is broken. This might turn out to be expensive, too, depending on what else should be changed (chain, sprockets / cassette, chain rings, shifter cables, ... ). If you end up replacing everything but the frame, a new bike might be the sensible option. I am currently rebuilding an old french road bike, I don't want to know how much I already spent... It helps, if you have another bike from which to cannibalize parts.
Maybe ask the nice guy at the local bike shop for an opinion, most shops really want to help you (some just want to sell a new bike, don't go there). It is difficult to judge the bike's condition without seeing it.