I've begun putting up fiberglass screening stapled to the joists. The electrical and plumbing is so complicated anything solid would be impossible to put up other than a hanging ceiling which would end up probably 6' off the floor. I figure the screening should prevent a vapor barrier while keeping the fiberglass from being disturbed and releasing particulates into the air. I keep a dehumidifier going in the cellar all the time that keeps it at 45-50% humidity so there should be little opportunity for the insulation to get damp. I also keep an air purifier going down there and am in the process of sealing the walls and floor with Drylock Masonry Waterproofing. Overkill? Perhaps? I never have water other than occasionally at the bottom of the sump pit.

So you're on the North Shore. Otherwise, you'd find mostly sand on the terminal moraines that are Long Island. Backfilling with sand or adding a bubble foundation wrap would have been your best bet against liquid water. Before enduring the odoriferous mess of Drylok I'd add another dehumidifier. We run two in the basement of our 3,700 sf home to keep the humidity below 50%. Drylok has a number of detractors. But I see that Paul Fisette, director of Building Materials and Wood Technology at the University of Massachusetts at Amherst is not one of them.

@Briana Bosch - since the wall has 3" of closed cell spray foam insulation, I believe it is forcing the water to flow down to the base. Nowhere is the wall wet. In fact, Im thinking of cutting off the drywall 1" away from the floor and put the vinyl baseboards, just to avoid getting the drywall wet.

Garage conversions have been done for decades. You can either turn the doors into windows, sliders or French doors, or if you want to block off one of the doors completely you have to be able to reside the closed off area to match the rest of the house. I have seen it done where they didn't match the siding but that reminds everyone there used to be a garage door there. I think usually the biggest impediment to building another more practical garage is lot size and contour. A lot of those houses don't have lots big enough to have another garage built on them, and if you want to have it on the same level as the first floor that has to work on the lot somehow. If it did work it probably would have been done when the house was first built. Maybe some of these houses could have another garage built on the back corner of the lot and connect to the house with a breezeway? This depends on the actual conditions and codes.