I just didn’t know how to deal with someone like that.

You tell them the truth. That means if you think their stories sound crazy you say “I think your stories sound crazy”.

I know that steps outside of the typical path of politeness, but telling the truth is the only way to help someone in that state.

She wasn’t asking because she didn’t know. She was asking because she knew they sounded crazy, and she wanted to give you an opening to discuss that.

Trust me. When a person is having paranoid delusions only the truth can help them. Saying “No that doesn’t sound crazy to me”, if it does, only makes it worse. That’s because people can detect when others are lying to them. If that person is so far out there that everyone puts on a mask around them, it will reinforce the idea that people are shifty assholes. If nobody ever tells them the truth then they can’t calibrate their sense of what’s real and what’s not.

It may seem rude, but if you truly want to help them, you need to be truthful with them. That includes saying things that might not be polite, such as “I think that sounds crazy”. They will not interpret that as rude. They will interpret that as honest, and it will be an enormous relief to them to have found an honest person.