You have stated several individual problems, none of them clearly.
First, combat in town is impossible without cheating, and if I recall correctly, is quite difficult to do against a non-cheating player even when the attacker has cheats. The game ignores attempts to cast combat spells, and I think also ignores player-vs-player damage while in town. The only way I can see to kill a non-cheating player in town would be if the attacker could corrupt your character in memory, forcing your current health down to 0.
Second, characters are stored locally. The presence or absence of an account on the server has no impact on the character. If your account on the server was deleted, you can make a new one and continue using your existing character. If your character was deleted locally or was corrupted, you may need to restore it from backup, but you can continue using it with the existing account on the server.
You can avoid problems by not playing in games with people who use cheats to attack you.
well first off i was useing the shop with gris didnt notice his lvl was 127 next thing i new was a fire wall was laided down and i was dead. i remember my friends talking about this backin the day and they all stoped playing.second the only thing i had download was diablo 1 no cheats found all my gear legit so dont assume i was cheating. well he forced me out the game that i made but after he killed me i saw my lvl was 0 when i got force out the game befor i could grab all my gear i had no char picture when i went to the lobby. then when i logged out and went to log back in had my name but i had to pick a class then make new pass and such. it was corruped and i didnt have any back up or saves didnt even know i could untill after that happen. and it was a open game i tend to drop iteams that are half decent in town for people to use if they join. sorry was trying to help people and got screwed over perrty much.
But it also dont really matter now since it happen i pretty much stoped playing. why would i want to play a game where they cant even stop this kind of stuff