This is a rather long story but please bear with me, I would really appreciate some advice.

Quite a while ago a woman in her thirties approached me about joining our club. She told me the name of her previous instructor and that she had got to purple belt (4th kyu) under him and wanted to return after a 10 year break. Her instructor is well known locally, he teaches wadoryu based sport karate. I teach wado, but have no interest in the sport side. our katas are very similar.

I told her that she was welcome to train and that if she wanted to wear the belt she had previously earned that was fine, although it may take a while to work back up to that standard. She was happy about that but said she had never actually collected her purple belt as she left training after passing but before her belt was ordered. I assumed her old club just did things differently (ours gives the belts on the day a student passes) and said I would order a new one for her, which I did.

She came to train and I was shocked that she could not remember what a forward stance was or how to kick or punch AT ALL. after two or three lessons it became apparent that she had either never been a purple belt or was a very poor one. On speaking to her more about her previous training, it became obvious that she may not have been completely truthful. She told me that on passing purple students started to learn pinan nidan and I knew her old club, like ours learns that kata for orange blet (7th kyu). I asked if I could see her previous licence and/or certificates so that our association could verify her current grade. It turned out that she had lost her licence and all certificates except her yellow belt (8th kyu) one.

Doubly suspicious now I spoke to her ex instructor who confirmed that she had only trained to yellow belt.

I told her that her old association had no record of her grading beyond yellow belt and in view of both this fact and the fact that she was really struggling to keep up with the purple belts it would be best all round if she trained in a yellow belt and was assessed at the next gradings.

She was absolutely outraged that "all that money and effort" was for nothing. I knew she was lying but rather than call her on it I said that she would be more comfortable training with the students of similar ability to herself (which is tue). She seemed to be very insecure and I suspected that that was why she lied. Although she was wrong to do so, she obviously had "issues" and I believed that by gaining confidence through training, she would become less insecure and therefore have less need to make up stories.

At her first assessment, she gave up after half an hour. At the next one she was awarded an orange belt. I was pleased for her as she had been training hard and I thought that was the end of the matter. She passed her green belt and then her blue (5th kyu).

However, three months after taking her blue belt she asked me why I had not put her in for purple belt. I explained that the average student training 3-4 hours a week takes around 6 months between 5th and 4th kyu and that she was making good progress, but not ready yet. She was very upset and then stopped training due to an ankle injury, which I know for a fact was fictitious as she confided in another student that it was an excuse because she was upset with me.

She has just re started training after 2 months off and wants to grade in January. I have just found out she has been telling at least one other student that she was ready last time (after 3 months as a 5th kyu) but that I would not let her grade. She has also been banging on to me about getting the purple belt "back" (you know, the one she never held in the first place, and I am finding it difficult to hold my tongue.

What shall I do? I can not challenge her because I will not break the confidence of the student that told me (and I know he is not lying, he just wouldn't).

She is obviously a lower standard now than when she was training regularly. I am tempted to put her in for grading and let her fail, but know that is morally wrong. I am also tempted to throw her out, but I feel that is also wrong because she is obviously mentally troubled rather than malicous. If I say she is not ready to grade, she will be complaining to other students that I am holding her back which is bad for the morale of the club.

How would other instructors handle this problem? And before anyone else says it, yes I know I have handled this badly and should have told her I knew she was lying in the first place, but I am still learning too.
Sorry again for the long post.