Just about anything can be legally sold provided it uses the phrase 'as is'. It protects both parties involved and as long as all details are disclosed concerning the property and its flaws there should be no reason that the property could not be sold legally. For example: cars are frequently sold 'used' with the term 'as is', with hosts of problems and with the agreement that the one who sold the car is no longer liable for any faults in the vehicle. The buyer agrees to such terms and takes responsibility of the costs of any repairs. The same should be said and done for other properties like houses and land.
I think that encumbered property can be legally sold. While it is a difficult task, as long as all the issues with it are taken cared of, then I do not see a reason why such properties cannot or should not be allowed to be sold. I don't see a problem with it.
An encumbered property can be legally sold, it's just that the lienholder gets a cut of the proceeds. People who owe money can't sell property unless the liquidation sale goes towards paying debts first before going into the seller's pocket. When someone is legally under the auspices of bankruptcy protection, that person must notify the court of any property sales so debts can be paid.
No, an emcumbered property cannot be legally sold, because the owner has to deal with the encumberment. The property can be sold with the encumberment, but it cannot be sold free and clear. A person with the claim does not lose their rights just because the person decides they want to transfer the property to someone else.