Looking For Advice On Failed Closing

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Location: Illinois

My wife and I signed a contract in mid-2026 to buy a house from an older couple. We went to the final walkthrough and realized that the previous owner canceled power, so our realtor reached out to get it flipped back on so we could check everything. While that's happening, our lawyer calls our agent and informs her that the closing isn't happening. The sellers' lawyer called ours and informed him that he (seller's lawyer) "f**** up". The property has the following liens:

• Primary mortgage
• Secondary mortgage
• State tax lien

According to what we've been told, the sellers' lawyer thought that the payoff statement for the first mortgage included the second. This doesn't make any sense because the second isn't even from the same lender - but I digress. Because of this, the second lien holder never signed off and the seller didn't have enough funds to cover the second mortgage, close and provide a clear title. Maybe I'm missing something, but I think all of this should've been caught earlier on and not on the day of closing.

We started digging into the title commitment this week and it just kept getting worse:

• The first mortgage has been in active judicial foreclosure since late 2024. It was delayed because the seller (husband) filed for bankruptcy and forced a 90 day stay. The auction is currently scheduled for this Tuesday.
• The seller (wife) has apparently filed for bankruptcy now to force another 90 day stay on the auction.

Our original purchase contract is effectively dead if the state or the second mortgage don't agree to basically take whatever they can get from the remaining proceeds. Now I'm trying to figure out:

Real estate questions:

1. How early on should all of this actually been caught? If I look at the liens and sum them up, even if we agreed to the sellers' original asking price, it still wouldn't have been enough to cover all the liens. So this was effectively a short sale that we weren't aware of.
2. Any tips on what actually happens at a sheriff's sale? If the wife's bankruptcy doesn't stall the auction, I want to be prepared. My understanding is I need to show up with a cashier's check in an amount of 10% or more of my winning bid (if I win).
3. Does buying at the sale actually get me title free and clear of the junior liens (2nd mortgage, state tax lien, HOA), or are there exceptions I should know about (e.g., property taxes)? The 2nd mortgage, state tax lien, and HOA are all listed as defendants on the auction.

Legal questions:

1. Does a bankruptcy filing by one of the sellers actually clear the way for a clean sale to a third-party buyer, or could the bankruptcy trustee still have a claim (e.g., on any surplus proceeds) that could cloud things later?
2. Since I'd have to bid cash/certified funds (no lender will fund a purchase-money mortgage at a sheriff's sale without insurable title), is there anything else non-obvious I should be bracing for as a first-time auction buyer?
3. I know we don't have any agreement with the sellers' lawyer (privilege or whatever...he doesn't have to act in our best interest), but is there any way to sue him for damages? As mentioned, even if we paid full asking this still wouldn't have gone through because it wouldn't be enough to cover all the liens. We're also incurring: daily mortgage rate lock extension fees, moving fees (movers paid hourly to unload our property into their warehouse, storage fees, etc.).

We have our attorney involved, but he seems clueless in these types of situations. My gut tells me he's only ever really done standard closes that don't have issues like this. I wanted a wider gut-check before Tuesday since this has been a mess from day one. Appreciate any real-world experience, especially from anyone who's bought at an IL sheriff's sale before.

My fear is that the bankruptcy drags the auction out another 90 days while we keep incurring fees from the rate lock extension and storage...and then we still don't have anything figured out.

Thanks in advance.