How to manage relationships with loved ones that have a mental illness?

Don't get me wrong, there are some sweet old men and women out there, but I'm here to tell you I just had the WORST experience of my life with my fiance's mother in law. We've been together for 3 years. Now granted, this woman has a right to have her own house, her own, privacy. Etc, etc,etc BUT, I'm here to tell you our story. She agreed to help us get off our feet so we were indebted to get like most young people do when some agree to help. We gave her cigarettes, made that woman coffee everyday, made sure she ate, and helped her when she needed it. That dirty woman hid behind her 36 diseases "Killing her all the time" and her COPD even though she's a smoker, and has degenerative alzheimers. She HID behind Battered women's syndrome and when she didn't get her way, she cried wolf. She told police my fiance was doing drugs, I was threatening her, he was abusing her when he was really sweeping the floor or putting dishes away. She called the police on us 3 times on us and they said if she does it again then she's going to jail if it was false. Then she filed a restraining oder on him because they were having a yelling match and she lost. After a while we left and stayed with two friends when she invited us back and violated her own restraining order. Now, fast forwarding in time to now, she uses her meds and lyrica to get drunk and mean to rant at us and then tell her lawyer we're the ones doing it. Where I live all if this seems perfectly normal behavior and we got told we're should accept it by police and her lawyer. My fiance even filed a mental hygiene on her should he deem her unkempt if she got too out of control because she chased us with a sword once at my fiance. Now I don't know about you guys but have any of you ever experienced this and how do you handle it because this last time she called her lawyer and made police escort me to the nearest shelter. Before they showed up she tried to have them think I wad laughing at the police and not at her and the whole time her lawyer was there and said nothing to defend me. I implore all senior lovers to think twice that not all are as nice as they might seem on the outside because this lady almost cost me my marriage too.