1.I would give them an honest review, after asking them if they want me to edit it. To be honest, I actually just got done doing that for one of my friends. Although she knows that she's not the strongest writer around, so she really doesn't take it to harshly.
2.I believe that reviews and ratings go to show how well of a writer you are, and when the reviewers criticize your work, it's usually because they've read something a little more professional, and in order for your story to get better you need to improve a few things.
3.I think that when a truly crappy story is posted, the writer just wants to see how good or bad they write. Maybe they want to improve, maybe they don't. Maybe they just want to have fun, and get their ideas out in the open. I sometimes get a few ideas after reading one of those stories, and in turn I write something that catches someone's attention.
4.To be honest, I would probably attempt to read it, and when it gets to the extreme I'd stop and review and get it out of my system that they can't be expected to get anything but negative feed back unless they correct the grammar, spelling, whatever. And I usually offer to help XD