1920s Notched Joists over Sill Plate

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Home is in Northern NJ and built in 1920. I'm looking at adding some rigid foam insulation between joists before next winter. The previous owner jammed a bunch of batt insulation between joists but there are plenty of gaps and it's costing a fortune to keep warm.

When I pulled out the batt insulation I discovered the joists are notched over the "Sill Plate" and the exterior walls are framed directly off the the plate resting on the foundation, so the entire exterior wall is open to the basement.

What problems am I looking at by creating an airtight barrier between warm basement and exterior wall? I'm looking into insulated siding in addition. I figured this was more of a framing question since it is uncommon.

Thanks in advance!
 
With that construction style you also have a fire hazard as a fire in the basement has a free run to the attic thru the exterior walls and when anyone has an opportunity fire stopping should be added.
Fire stopping can be 2x4, 1/2" plywood, 1/2" osb or 1/2 inch drywall, After that foam board can be added in that space, they cut it a little loose and fill the gaps with a can of spay foam.
But foam in a living space should be covered with drywall because if the gasses it gives off in a fire.
 
And the notched joist were common back then, inspect them, most times they are fine but if cracks are there, solid blocking can be added on both sides and a hanger can be added. The solid blocking might work as the fire stop and have some foam board behind it.
 
Would it be acceptable to install 2x8's against the sill plate between the joists and then install rigid foil faced foam directly in front of the fire block?

I suppose the batt insulation acts as a minor form of fire block but half of it is black from air flowing past so I would like to create a better seal
 
Would it be acceptable to install 2x8's against the sill plate between the joists and then install rigid foil faced foam directly in front of the fire block?

I suppose the batt insulation acts as a minor form of fire block but half of it is black from air flowing past so I would like to create a better seal
If the 2x8 can block air flow, yes but you could put the foam behind that and seal that first too.
 
It's called balloon wall construction.
When I hear 1920's and want to make it energy efficient all I see is dollar signs.
All I did was work on 100 plus year old houses for 15 years.
Just a few of the things I've seen.
They added new replacement windows but no one ever took the time to remove the moldings so there's a huge empty hole on the sides of the window where the weights where.
They had blown in insulation added from the outside long ago, not going to work in old houses.
It's going to settle under the windows and top plate, there's likely diaganals in the outside corners with no insulation under them.
Never once have I seen an attic air sealed and the correct amount of insulation in an attic.
https://www.energystar.gov/index.cfm?c=home_sealing.hm_improvement_insulation_table
Fire blocking needs to be added at the top and bottom of the stud bays.
 

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