My suggestion is to have the character move on, but never forget. Have her send money to the town to help with the rebuilding. Have her take the Leadership feat and send loyal soldiers there to defend the town against the winter attacks (which no doubt will continue, even though the town is weakened--
especially because the town is weakened.)
If your paladin is like mine, then she belongs to part of an established, hierarchical Church. Find yourself a priest and ask for Confession. Role-play out your character's anguish that she couldn't help the town she had come to think of as a second home. Have her express her guilt that she may not have been as diligent as she could have been, and that it cost innocents their lives.
In other words, milk it. Rather than looking at the tragedy as something depressing, try and view it as a beginning. Now there are many tasks your character will be passionately driven to complete. The restoration of the town. The future defense of said town. (You failed it once, and by
God you aren't going to fail it again!)
And once the DM sees that you've made this incident central to your character's development, he'll likely start running with it himself. Perhaps your Confessor will agree that you
were complicit in the destruction. He's received a dream, that the only way for you to atone for your sin is to forge from this tragedy a beacon of hope. Taking some of the ashes from the burned buildings (and people), you must carry them to the top of the Mountain of Sanctity and deliver them to the hermit Eilonwar, then bear the burden he lays upon you all of your days.
*ahem* I'm being inspired just thinking of the possibilities.

If I were your DM, you'd wind up winning a Holy Avenger named
Camber's Legacy, and facing down the Elder of Halruua in an epic conflict!