I asked my future husband's sister to be one of my bridesmaids, and she agreed. After about a month she backed out because we didn't ask her live-in boyfriend to be in the wedding party, and he was hurt. We don't know him that well. This has caused some hard feelings. The family feels we're wrong and that we should have just let him be a part of everything. Are we wrong, and is there anything we can do to make everyone happy?
She's being ridiculous, and you are being more than nice about it. Remember that it's up to you who makes up your wedding party, and obviously you have chosen just very close family and friends. Also, it doesn't make sense that she accepted and then later backed out because she realized his feelings were hurt. It sounds like this is more about what her boyfriend wants than what she wants. At any rate, she is the one who's out of line, not you.
All that said, there is the option of having him in the wedding if it'll just make everything easier for you, especially if his family is in on the protesting. The idea that the person you're paired with in the wedding has to be your companion for the rest of the celebration is just not the case. Make sure they know that! It sounds like either you can put up with everyone being mad about such a silly thing and stand by the principle of it, or you can just say fine, and then no one will bug you about it. Yikes. You are not wrong to want things the way you want them. You did not do anything rude by not asking his sister's boyfriend to stand up in the wedding. Now you just need to decide what the least painful way of dealing with this is. Good luck.
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