Though I'm an agnostic, not an atheist, I don't think anyone can rightfully say that there is nothing historical in the Bible. For instance, the reign of Hezekiah and the gist of some of his account in the Bible have been verified by archaeology. It's a misunderstanding of the atheist position (sometimes fostered by hyperbolic comments from individual atheists like, "It's a book of lies") which says that an atheist thinks there is no truth in the Bible.
As far as where to draw the line, why not at what can be proven historically? Generally speaking:
- Creation account and tales of patriarchs down to the time of the Egyptian captivity: no evidence
- Return from Egypt under Moses: grain of truth? Perhaps a contingent of former Egyptian slaves joined Israel, or at least a people that came from the direction of Egypt. We can see Egyptian influence in the practices of the Jewish priests.
- Babylonian captivity: I believed this is verified. It was not uncommon to deport people to work as slaves in another land, and we can in fact see the effects that Babylon's religion had on Jewish beliefs post-exile.
- Some kings and other important figures in Judah/Israel: clear evidence in historical records, and I think Nehemiah's rebuilding of Jerusalem is more or less factual. Some of these people were no doubt real.
- Miraculous events in the lives of these individuals: no proof, naturally, so why should we accept them? Just because half of an account is true, why should we accept the other half that is much less plausible?
- New Testament gospels: Lots of evidence points to these being written by non-eyewitnesses and being the product of a sort of literary evolution from predecessor documents. Very little, if any, of a historical person named Jesus (Joshua) remains in the accounts. Perhaps he lived, but perhaps he didn't. Perhaps he was a Jewish teacher, or a Messiah claimant that was killed by Rome.
- Acts of the Apostles: Heavily contested. Probably none of this happened, according to many scholars.
- Epistles: Some were written by Paul and other claimed authors, some were falsely written in their name and use a different style of writing.
- Revelation: A possibly-drug-fueled diatribe against Rome and Nero (that is, the man with the number 666). Just barely made it into the canon.
You would find it very educational and eye-opening to buy a book about the writing of the Bible and its contradictions. Basically, we can tell from the "seams" that it's a collection of disparate writings by fallible men. Anachronisms, changes in language, duplicated stories that have been pasted together, etc.; it's a mess.
As to tales of possession, well, people are mentally ill. People are suggestible. That's no reason to assume possession by an immaterial being. If you saw somebody moaning and drooling with their eyes back in their head, how would tell if they were (a) demon-possessed, (b) on a drug trip, or (c) having a seizure? Satan and the demons are an unnecessary factor in the equation when explaining bad things and human behavior, so atheists simply strike them from the equation.
