Prison inmate in really horrible settlement (7)
I believe the answer is:
village
'settlement' is the definition.
(village is a kind of settlement)
I don't understand how the rest of the clue works.
Can you help me to learn more?
(Other definitions for village that I've seen before include "Give all (anag)" , "Rural community" , "Small group of dwellings" , "Large hamlet" , "Settlement smaller than a town" .)