Re: paladin
I think there's two different things going on here.
Firstly I would simply suggest letting the player switch alignments / religion to something that resonates better. Covering up a player's disconnect with his character suffering amnesia would seem to an unsatisfactory way of doing that.
Remember that in 5e any of the three Oaths can be any of the nine alignments, although some do mesh more obviously with some alignments than others.
I've successfully played a Lawful Good paladin of Vengeance (Dirty Harry template) and a Chaotic Neutral paladin of Devotion (Conan template, by Crom!)
Now alignment change and/or amnesia as a long-term insanity? Sure.
But I think it works better as something for an NPC.
In my campaign (if you read above), that's basically what I have had happen to Prince Derendil and Shuushar. Their true alignments are "Quaggoth" and "Arch-priest of Blibdoolpoolp", albeit I have decided that the madness has been turned up to eleven and can't be removed by the regular methods (unless I want it to, for story reasons)
IIRC in OOTA, the derro are unaffected by the Madness, since they are bugnuts to begin with. I tweaked Buppido to have him lured / turned crazy(ier) by the Demon Lord of Lies and Deception (Grazz't), since I felt that worked better.
So there's nothing wrong with what you are proposing, but I would think again.