I would probably cut off the bad part first. From that I would cut a swatch and measure it (maybe 8" x 8"), then machine wash and dry it to see how it comes out. If it has been washed before, it may not shrink. If it comes out a nice texture, I would probably use it as batting in a special quilt and put the info about the blanket on the quilt label. If it felts (shrinks alot), I might still use it for batting but I would also consider using it for felting projects (mittens, etc.).