Well I found the problem. It's just what I thought it was. There are 3 notches sheared off from 1 gear and 2 more from the one next to it. The corresponding gears resting in the opposite side case are shaved and ruined as well. I made sure to retrieve all 5 notches from the motor.
I want to mention this because I feel like it has some bearing to the problem - so the countershaft bearing holder when I went to remove it, WOULD NOT come out. It wouldn't budge at all. It took over half an hour of carefully trying to pry from every angle, then several minutes of the torch and finally I was able to knock it out. When I did the bearing was still on the gear shaft and not inside the holder. I mention this because before I removed it, the gear drum wouldn't move at all, just as it wouldn't when the bike was stuck in gear, it was stuck to the same limited motion, BUT when I removed the holder the gear drum twisted like it should. Not sure if it's related to the main issue, but thought I'd mention it.
I know this question might open a can of worms, but I would really like to know if anyone has any insight as to what could've happened.
What should my next steps be, aside from finding replacement gears?