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When the computer restarts - hold CMD + R for recovery mode. Select your external drive to boot from (I selected the TM drive but I think the one with the OS would work as well - perhaps you could even use an empty drive). When you turn your computer on - keep an Option key pressed. (I also had another drive with a TM back up from a while back hooked up to the MacBook) Since your hard drive is inaccessible - you will have to get an external drive and use it to enter Recovery Mode. The essence of the process is that you have to unlock and decrypt the hard drive but for me that has only been possible through a Terminal in recovery mode. There is a way to unlock the hard drive and possibly to decrypt it, this will allow data recovery but I am not sure if it'll allow to install onto that drive without wiping it (I haven't gotten to that point yet.) This isn't really a new issue to Mac OS, it has happened before.

So the way I understand this correctly - the hard drive got locked and encrypted somewhere in the process of the update. I've been digging for solution for over 48 hours now.
