It is very unfortunate that your wife is holding onto a grudge, especially towards her parent-in-laws, which is not good and will affect her relationship with you as well. Whatever happened, and if they were right or wrong, both sides should think greater than that and focus on building good ties with each other.
Her demanding you to cut ties is also very unethical and haram as well, and you must not accomodate to that as well.
She must learn to forgive and forget, and respect elders, and forcing someone to cut ties with parents is gravely wrong and a major sin.
It is absolutely forbidden in Islam to cut ties with your parents and this sin is one of the most dangerous major sins which has disastrous results in this life and hereafter. Never listen to any one who tell you to be away from your parents because this is what Shaitan wants you to do in order to be with Shaitan against Allah and against your parents. Whatever your parents did or still do which you don't like, you must be very nice to them even if they were unbelievers.
It compulsory to compensate such behaviour to be sure to avoid the bad results of it in this life and hereafter. Bad deeds must be countered by very good deeds as we read in Quran ( Surely, good deeds remove away the bad deeds)( Sura Hood;114).
1. If your parents are alive, you must serve them with out letting them ask you and fulfill their needs and wishes as much as you can to make them really feel that you are compensating your misbehaviour.
2. If they are not alive, you must do maximum good deeds and gift it to them like getting their religious debts performed e.g. missed prayers, fast, Khums, Hajj or any other debt they had. Above that to give Charity on their behalf or recite Quran or Du'a, Majlis, Ziyarat, Hajj and Umra.
3. Visiting them if they are alive or their graves as it is like visiting them and it makes them happy.
4. Praying for them every day and night especially during and after all your prayers.
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