I need help with a situation where a buyer has altered an item they bought off me.

[y.susa1]

Hello Everyone,

I have been selling on ebay for a few months now and I have to admit, despite all the horror stories I hear, things have been going quite smoothly for me. That is until recently.....

You see, a buyer has paid for an item and I proceeded to package the item and send it off along with the tracking number which was provided the very next day. The item was delivered in 5 business days through a 500g ebay prepaid satchel. Feedback on my part had been submitted as soon as I recieved the payment. 

Now 2 days after she recieved the item she emailed me and stated there was 'a loose thread below the right knee which has lead to a hole'. She sent me a picture of the hole.

Now before taking the time to list the item,  I was absolutely sure there was no loose thread's, or loose stitching or frays in the item (keeping in mind I even checked the item inside out before purchasing for resell from used clothing supplier).

The first thing I needed to do was to ask about the loose thread and if the hole had been made in the process of wearing them or if they just happened naturally from wearing the jeans and to check that the picture the buyer emailed through is in fact the correct jeans and had not innocently been mixed up by buyer with another purchase. So I replied and asked for a full length picture of the jeans so I could inspect the damages before deciding to discuss the refund.

The next day the buyer stated that they attempted to 'get creative and turn them into shorts (didn't go so well)' and that buyer would be happy to send me a photo of the jeans. I thanked her and waited. 

To my horror this morning I recieved the picture of the cut jeans (buyer cut the legs very short and stated they are unwearable and will fall apart if washed and requested for a full refund on item.

I just replied and stated that I will reach a decision tomorrow on the refund and asked buyer to expect a final decision from me tomorrow afternoon.

The thing is, I am afraid of any negative repercussions if I don't refund the buyer even though my stock is damaged and I can not resell it.

What happens if the buyer lodges a claim against me on ebay and or paypal stating that item was significantly not as described and states buyer actually recieved the jeans in the altered condition? How do I prove my case? What happens if buyer leaves negative feedback? (I am currently 100% positive) and finally what happens if buyer decides to ebay stalk me or purchase from me again under another username or account? Ok maybe I am over exagerating on the last point (but I have read about the ebay stalking happening to other sellers).

And if I submit the ebay messages from buyer as evidence will the buyers phrase 'I tried to get a bit creative and turn them into shorts (didn't go so well)' along with the picture of the cut up jeans buyer sent be enough to prove my case with ebay and paypal?

Sorry for the long post everyone. 

Also, Thank you in advance for any constructive input, guidance or advice you could give me.