that the bracketing would be based on whatever subject distance the camera was set to when I locked it by pressing MF. Is this not true?
This is true. Algorithm of CHDK bracketing supposes that if subject distance override value is not set than current value of manual focuse distance is used. But there is some trouble with focus lock

My camera is hangs up too...
I suggest you to do next sequence of actions:
1.Turn on MF-mode (clearly without focus lock)
2.Change camera drive mode to continuous
3.Set some value for focus distance (via Canon native ability or via CHDK override (set value in menu or in MF+alt mode)
4.Set some bracketing values
5.Start
I think that in this case all will be alright