Should I keep the nikon 35mm f/1.8?

I have a nikon D7000 with 18-105mm and a 85mm 1.4.
I do most of my portrait work with the 85mm and use the 18-105mm as an all purpose lens. I got a 35mm 1.8 recently for indoor photos of family and friends, etc. And possibly outdoor at night.

So far I'm quite disappointed with this. For example, comparing an indoor photo at f/1.8, ISO400, 1/20 to a photo from the 18-105mm at 35mm, f/3.5, ISO1000, 1/20 (with VR); I found the 18-105mm did a better job. With noise reduction in post, you can hardly tell the difference.

When taken outdoor, the 35mm shoots faster for sure, but the bokeh it produces is quite disappointing. The christmas tree behind the group is neither in focus nor out of focus. I had to stop down to f/3.5 (and higher ISO) to get a decent shot. I honestly thought the DOF would be much deeper at 35mm 1.8.
In other shots, the bokeh seems distracting rather than complimenting. (And if I have to shoot outside, the 85mm is pretty nice, even though I have to step back quite a bit to get it.)

If i want good bokeh, I use the 85mm (35mm has some bokeh, but not sure if it is worth it). If I want a group shot I prefer a greater DOF, which means the 18-105 fills the need. I really want to like the 35mm, but I don't seem to have a use for it. Should I return it?

Good "Bokeh" occurs with long lenses. As you buy shorter and shorter lenses, you can't expect to be able to use selective focus.

You should know this from one of the lectures in your first class in photography.

Yes, return the 35 mm and don't expect so much from a "prime" lens. They are NOT magic.

For the kind of photography you seem to be doing, you really need to eventually buy a 24-70 mm f/2.8

Seems to me you already made up your mind!
Return it!

You have discovered the myth that it takes a fast lens to produce good background blur.

Only short focal length lenses have to be fast. Telephoto focal lengths can still produce pleasing background blur at moderate f-stops (f/5.6, etc). But a fast telephoto is going to produce killer bokeh.

Here is a website comparing how different focal lengths stack up for background blur:

http://www.althephoto.com/concepts/selectivefocus.php

You did not specify in the indoor example what was so displeasing about the 35mm lens. I did notice that you were using 1/20th with VR with your 18-105, and since the 35mm has no VR, then without it.

Did you use a tripod with a remote release? Was the 35mm example perhaps a bit blurry? If not, test again and see if there are any other differences. Using post processing for noise reduction softens the image, so the 35mm should have looked sharper, which makes me believe you might not have used a tripod.

So try that test before you can your 35mm lens.

The primary use of your 35mm should be for low light in the typical shooting situation.

Not every prime lens is equal as you found out

And the cheaper Prime lenses are nice to own but not all do offer the creamyness you desire. So since you are not happy with it yes Sell it.

I hope you find with lotsa research a lens that does offers what you desire.

At times I have owned things I wanted to like. But after a while I still didn't like it. So I sold it on that is life.

The money you get put it aside and who knows.

The 35mm is not for everybody as they say.