How would you have handled that situation? Was it an overreaction on my part to leave and never go back?
To answer your questions:
I would not have "engaged the crazy." Specifically, you said:
She continued on, saying crazier and more hateful things, so I finally said "Excuse me, but I'm trying to hear this."
I would not have said anything. I would either ignore the woman, get up to use the restroom, or step outside.
Yes, this. Just because someone is talking doesn't mean you have to respond to them. Especially when they are saying crazy things.
With someone like that, I think I would have been afraid to corner myself in the restroom! If she was escalating, I shudder to think how far she may have gone! Probably not, but caution is a good thing.