Khouri was born in Jordan in 1970, and in 1973 she moved to Chicago in the United States with her parents. She attended a Catholic school in South Chicago. In 1993 she married John Toliopoulos, the father of her two children, Zoe and Christopher. Circa 2001, Khouri, Toliopoulos and their children moved to Australia, from where she published a supposedly non-fiction account of the honour killing of her best friend in Jordan. After the revelation of her literary hoax made headline news, she moved back to the United States. She is the subject of the acclaimed 2007 film Forbidden Lie$.

On July 24, 2004 Malcolm Knox, literary editor of the Sydney Morning Herald, revealed that Khouri was not in fact living in Jordan during 1993-1995 (the timeframe of Forbidden Love), but was living in Chicago with her husband, John Toliopoulos, and her two children. She had not lived in Jordan since her early childhood, except for a three week stay during which she apparently researched the background for her book. Knox further revealed accusations that Khouri had left the United States while being investigated for the fraud of an elderly neighbor.

Things were further complicated for Random House Australia because Khouri was sponsored under the category of nomination for distinguished talent in 2002. On July 28, 2004 the Department of Immigration and Multicultural Affairs said that Khouri was cleared of violating her visa stay regulations. However, Khouri had already left the country of her own accord.

Khouri has said she will co-operate with all requests to provide documentation and was said to be preparing to publish her next book A Matter of Honour in November 2004, again by Random House.

However, on August 18, 2004, Khouri spoke publicly and admitted that she took "literary licence" with the book, claiming that she did not receive any payment or royalties for the book.