Recovering from a brake pad fire isn't all that bad. You'll need a new caliper, pads, and rotor. The sway bar link will probably be melted and need replacing. Likely a good time to replace the flexible brake hose.

A more important question is why the brake(s?) locked on. Was it only the one side, or were both having the same problem? If both the master cylinder is suspect - this is a known failure mode. If only one side locked on it's likely the old flexible brake hose acting as a one way valve. In that case it's time to replace all four Could even be as simple as a stuck caliper piston. If so one of the charred brake pads will be much thinner than the other. It's important to find the root cause lest the problem occur again.

Many years ago my wife drove her 123 home 30 miles on the freeway with the rear brakes locked on. She had to call the fire department upon arriving home.

Surprisingly, the rear wheel bearings survived unscathed. A friend now owns that car; I think it has at least 150K more miles.

- JimY

I have had that happen too. and I believe JimSmith has related the same thing.. there is at least one discussion in the archives about it.. but it is not often brought up as a potential cause. Since it is inside the rubber line many other things are often replaced with no change in the situation .. until the brake lines are the only thing left to replace.
Rubber brake lines are not replaced ' on principle' ( as MB refers to it ) as often as they should be.

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1980 240d ,

chain elongation, cam marks reference:
http://www.peachparts.com/shopforum/diesel-discussion/10414-help-i-need-check-stretch.html

http://www.peachparts.com/shopforum/diesel-discussion/305365-9-degrees-chain-stretch.html

evap fin cleaning:

http://www.peachparts.com/shopforum/diesel-discussion/156207-photo-step-step-post-showing-w123-evaporator-removal-1983-240d-1982-300td.html?highlight=evaporator

A/C thread

http://www.peachparts.com/shopforum/diesel-discussion/297462-c-recommendations-mb-vehicles.html