Comment 138 for bug 120375

Ok, I'm answering myself: there is a workaround for getting it to work with LUKS encryption. You can run "sudo dpkg-reconfigure mdadm" and enable automatic startup with degraded RAID array if you want, or watch the screen and be quick enough to answer "Yes" when asked to start degraded. Nevertheless, you need to wait again until you're dropped to BusyBox. Then do this:

# to enter the passphrase. md1 and the md1_crypt are the same values
# you had to put in /target/etc/crypttab at the end of the install
cryptsetup luksOpen /dev/md1 md1_crypt

# (type your LUKS password, as requested)

# continue to boot!
<hit CTRL+D>

I found the instructions from here: http://ubuntuforums.org/archive/index.php/t-524513.html

Now, if only someone could give a hint on how to make this automatic, so that there would be no need to write anything. It is ok to wait a few minutes, though.

Nevertheless, I'm pretty happy now that I can use "--no-degraded" parameter in 85-mdadm.rules, yet get the system up in case a disk fails. In the rare case of an actual disk failure, writing a one-liner can be tolerated. Thank you everyone who have worked with this issue and helped to get it solved in Hardy.