Fuego, I think you need to find a way to convince DW (you metioned that she has like 60% say in the matter), that it's not in both of your best interests to bail out her sister. I know that won't be easy, but if you can, then DW can say to SIL, "DH just won't allow it". End of conversation -- hopefully
I'm not married, so I might be making it seem easier said than done, but I've seen it so many times, an accepted answer is "DS (dear spouse) decides against it" and the answer is finalized. You have to get to this point.
This may be the approach we end up taking. I have offered to be "the bad guy" and say "no", and then DW can say, "we make financial decisions of this magnitude jointly, and I respect his decision in this matter. Unfortunately we cannot help you".
During the intervention we are going to determine to whom exactly all these debts are owed. Assuming it isn't to leg breakers, we will encourage defaulting, or making some token payment and stating that that is all she has (which is true).
More info has come out recently. Apparently she has approached others in the family about borrowing money, always with "this is a secret, no one else can know". She has also said "you can't tell my husband, he will divorce me", which is ironic because it is the lying, sneaking and gambling that is making the husband examine his continued role in the relationship. Their son's college account of $1000 was raided and is empty now (3 years away from college).
IF (a big if) we do lend any money, we will be making a number of conditions (too long to list here in full). And we will receive security interests on her currently unencumbered SUV (jointly titled), and a security interest on her gold jewelry by physically possessing it. In the event she defaults, we liquidate the jewelry first (goin to da pawn shop). Then take her car.
One hitch with the car is that it is jointly titled, so her husband would also have to sign over the title to us as lienholders. He has previously expressed he will not do so at this point, so that may be a deal breaker. Whatever the outcome, I doubt we will be making a loan for any amounts exceeding any security we will receive. Don't know if it is $1000 in gold or $10,000 or $20,000 or what.
And at this point, DW's mom (SIL's mom also) has agreed to put up 1/2 the amount needed without requiring any security interest in anything. Which has cut our potential loss to a much more reasonable (sarcasm) $10000 or so, less any security we might receive.
The problem with mom putting up the money is, they aren't exactly wealthy. They will have the typical American retirement - paid off house, smallish social security x2, and a low five figure savings account. This amount they will be "loaning" represents a significant portion of their savings.