I need advice, no one else to ask...

On Christmas eve I adopted out one of my 8 week old kittens who was being treated for conjunctivitis and was on the mend from being electrocuted 4 days earlier. The new owner knew about these things, took his meds, etc. When I say he was electrocuted, he wasn't severely so and was brought to the vet right after it happened. He bit into a electric cord behind my desk Cute kid, but not so bright, he was the accident prone one in the litter of 4 from the moment he was born.
He was on a eye ointment and a preventive antibiotic for the burn in his mouth from the shock. She took him, his meds, and copies of his vet papers/insturctions for meds. This woman had put a deposit on this kitten three days after it was born and had waited a long time to bring him home for herself and her 5 year old daughter who was being surprised with him on Christmas morning.
The only reason I let him go and went against my gut to keep him until he was done with treatment was that they live literally 5 minutes away in the same city as me and I was supposed to be in close contact with her until he was better with the understanding that he would come back to me if anything was amiss. I talked to her so often over the 8 weeks that I felt comfortable with her.
He was at the end of the pink treatment (one more day left on ointment and the eye was fine) and was 4 days into a 7 day course of antibiotics for his mouth and all the swelling was down, he was eating/drinking/playing/peeing/pooping, etc. He was extrmely fiesty and everything.
I screened this woman what I would have said was well. There was an in depth adoption questionier that she had to fill out for me to approve, etc.
So she takes him on X-mas eve. I e-mail 2 days later to see how he is because I hadn't heard from her yet and was getting antsy. I get a reply within 3 hours telling me that he is awful and at the animal hospital where he has been admitted. She's telling me that his mouth was rotting away, he had a horrible Upper Respitory Infection, a heart murmur (my vet never said anything anout a heart murmur) and that they were not sure he would make it! She says that she'll be expecting her $40 adoption fee back as well as forwarding me all of his vet bills to pay and that she's going to call animal control to come out and check on my animals.
I immeadiately go to her application and call the number on it to talk to her but it's her work number and there's no answering machine.
So I e-mail her all upset and worried sick about the kitten. He was fine when he left here, I just cannot get my mind around after having cats my whole life and doing rescue work/fostering/shelter work how he would have gone from being 98% to being on his death bed in two days. She claims his eye was awful again (with only one day left on meds).
I tell her that she can certainly have her adoption fee back to put into his care and that I just don't see how this happened, etc.
I also (now this part may get some of you upset but it's how I feel) tell her that I cannot afford to pay her vet bills at all (we're bad off right now, really) and that if he is truely that bad that I would pay for him to be put down but that's all I can do.
I wait. and wait. I sit on pins and needles waiting for animal control to come out (though I know the ACO well and who knows if he would even come out here) I hear nothing for exactly a week while I call around to animal hospitals locally and I cannot find where he was/is. Two places tell me that they cannot tell me if someone was a patient I am worried sick. I cannot sleep, and I have panic attacks all the time.
Then yesterday morning I suddenly see an e-mail from her.
She tells me that he's pulled through and is home, on two meds twice a day. She tells me that she wants the adoption fee (I told her a week ago to just come get it, I'm home all the time) and that she's still planning to forward me the vet bills for reinbursment and that if I don't pay them I'll be hearing from her lawyer. She says the bill is $500.00.
I only asked an adoption fee for these kittens to put into the spay for the mama. My husband and I have been fostering and adopting out animals for nearly 10 years and I was doing it before I met him and I usually don't ask an adoption fee for animals or if I do, I might wave it the day they come to actually get them. This is not about money, is what I'm getting at here.
I cannot in any way afford to pay a $500 vet bill and I'm not sure that I should have to legally as he had been seen and was on treatment and was due for a check-up this coming week, which she was supposed to keep with my vet. I made sure he was wormed and had his first shots.
I'm shaking in my boots and I don't know what to do. We make just enough to scrape by month to month and that's with food stamps and trips to the food bank. I guess I could afford to give her $1 a month for 500 months but that's about it.
Does anyone have any advice on this other than that I should always listen to my gut and I should have never let him leave?
I'm worried about the kitten now too. Who knows if she's lying or not, these kittens were born into my hands and I poured my heart into them for 8 weeks. I cried when each of them left, this is tearing me up.