I understand what you going through completely. My family has been through the same thing but from my husband's grown daughter. We have cut off all contact with her and will have nothing to do with her. We have threatened her with legal action and won't hesitate to do it. She knows we have the proof. I keep everything that she has ever sent to us. She has put us through hell and back countless times. Stooped so low as to accuse her father, my husband, of the lowest dirtiest thing you can think of. Once she done that we said enough is enough, told her to never ever contact us again. If she did, it will either be ignored and if she continued she will be charged with harrassment and whatever else is needed. Luckily for us it's been quiet for a long while but we know that she'll never stop, so it's a manner of time.
As far as how we handle it. At first it was extremely hard because for me, I was hurt for my husband and I would be extremely mad at her to the point where I dwelled on it to the point of making me sick. I finally realized that you can't change someone, you can't reason with insanity. She was/is unable to rationalize or to understand our side so it was a losing battle. She is sick and that's unfortunate but what can you do? I had trouble trying to forgive her because everytime I would come close to forgive her she would do something again and it would start all over again. You have to keep on forgiving until......Forgiving is not giving them a free pass it is freeing the hate, the fear, the disgust that you are feeling. You forgive but you don't ever forget. If you believe in God, give it up to him. Talk about it, get it out. What I did that helped me was keep a journal of sorts on my computer in a locked file. I would write letters to her explaining my feelings and views and then I would just save it. She will never see them but once I did that, I actually felt better. It was a type of release. Sorry you are going through this. Certain people thrive on drama and can't tell the truth to save thier lives. I know that to be true of my stepdaughter. No one her dad's side of the family nor her mom's side want anything to do with her. She has chosen to alienate us all. That's sad.