To question 2, I believe the admins same rules apply as to being arrested for a period of time if the owner refuses to let you out. It used to be they would either move you or let you drop and recreate, it just depended on who you got and what mood they were in. Probably pretty standard now that they just let you drop your character like always.
I'm unsure to question 1, I was thinking you turned into a trophy ear, but I'm most likely wrong.
I've always wondered about number 1 too. I don't think it's been listed anywhere, but yeah. They ARE supposed to be turned into a NPC. I'd think a slave or criminal type would make sense.