That's a sad situation...I don't know what would be the solution: it is delicate because, obviously, you cannot get a refund from Paypal after such a delay...
It seems that you are in the same situation as I am in: in fact, I must say that I can really sympathize with you because I have a similar problem with another member here : I sent him in september/october 2011 a payment for the reparation of one of my sabers (a dysfunctional S..f..ge saber : it was intended as a gift for my little brother: I needed that before the end of January) and for a (relatively simple) custom work as well. In december, he asked for a delay (which I happily granted him), saying that he needed more time. Then in January, he told me that he was in a delicate (familial and material) situation, and that there would still be another delay. I was accomodating and I accepted but I simply asked him if he deemed it to be feasible to have at least the S....ge saber finished before Februrary the 17th (as a new deadline) and I told him (in a quite straightforward but very polite and kind manner) that if he thought that it would not be possible, then I would not hold it against him and he could quite simply send the first (unrepaired and dissassembled) saber back to me, and give me a partial refund at least. I must have written about a dozen messages before getting an answer from him early in January, he told me that he apologized for the very long delay, and that he was confident that it would be finished before that new deadline, but then when I asked him if he could refund me should the completion of the reparation finally prove to be impossible before mid-February 2012, he did not answer and left me in the dark... (you have to keep in mind that this particular saber was intended to be a gift for my brother's birthday, and that it was already late at that time...) Since then I have been trying to contact him back again and again to clear up the situation, but it has been to no avail...I have written almost seven or eight new e-mails, and I do not know if I will ever see my sabers again one day... :( :-\