Either put in a reman, or pull the heads and see what the damage is and go from there.

Nothing at all to do with the tires, sounds like you have a brake hanging up or possibly a wheel bearing that’s completely trashed.

I didn’t believe you but checked a couple of catalogs and the aftermarket limited slips for 7.5s all say fit 3.23 and up only. I assume it has to do with the size of the ring gear being too small on the 2.56 to fit the carrier. Unless GM ever made a limited slip for a 2.56 (unlikely) then I think your choices are stay with the peg leg, or go to a 3.23. Unless your intended use is days at a time on the highway at 80 mph I’d put a 3.23 in it- that dog of a 5.0 needs all the help it can get, and will be a bit nicer around town and what not with a 3.23.

Well, it’s your vehicle, so you can get it back, but he probably has the right to put a lien on it against what you owe him so far, assuming he’s done work. Since it sounds like his business is either failed or failing or it’s no longer his priority, I think you should assume this isn’t going to ever get finished, certainly not on the timeline you expected. The best way to handle it is arrange a face-to-face meeting, inspect what he’s done so far and negotiate a cost for the work actually done to date, pay and then tow your vehicle elsewhere to get it finished. If he’s no longer in business or you can’t get in touch with him or whatever then I’d definitely get legal advice about how to reclaim your property before it gets caught up in a liquidation sale or held as collateral or otherwise caught up. Regardless, you did authorize him to work on it and you’ll still owe him for what he’s actually done, just need to negotiate a price you both agree on for that work.

It would be a major repair, doubtful it would be economically worthwhile, and if it’s that bad probably the rest of the car is as bad or worse. Probably time to call the scrap yard.