What is the Chabad custom regarding eating matza meal or letting any water come in contact with matza?
“Gebrokts”: Wetted Matzah goes into detail on the provenance of this minhag and explains why chabad does not use it. While speaking with baalei batim who are members of chabad, I have been told that many people will keep the matzah in plastic bags when eating it so as not to get crumbs on the table that might get wet.
The source for the minhag is from Responsa of Rabbi Schneur Zalman of Liadi, no. 6.
The custom of not eating gebrokts gained prominence around the end of the eighteenth century. At that time, people began to bake matzahs much faster than halachically mandated, in order to be absolutely sure that the dough had no chance to rise before being baked. The flip side of this stringency is that the matzah we eat today is not as well kneaded as matzah used to be, and it is very possible that it contains pockets of flour.1
The stringency of not eating gebrokts applies to matzah and water only—not to matzah and pure fruit juices or other liquids,2 which don’t cause flour to become chametz.
Note that the article speaks of gebrochts as a minhag, which means that it is a chumra that is not treated as chametz on Pesach. Similarly, there is a minhag to davka eat gebrochts on the eighth day of Pesach, since it is Yom Tov Sheni shel galiyos and is treated as mi'drabbanan. If people actually held that it was forbidden, they would be unable to have this minhag.
On the eighth day of Passover, which exists only outside the Land of Israel, the gebrokts stringency doesn’t apply, and all feast on matzah balls and matzah brei, and dip their matzah into soups and salads. In fact, many have the custom to try to eat their matzah with as many liquids and wet foods as possible.3
The simple reason for this is that the celebration of the eighth day is of rabbinic origin.
But there is also a spiritual reason given for eating gebrokts on the eighth day:
The last day of Passover is connected with the future redemption (see Remembering the Future), a time when no evil will befall us. We reflect this reality by going out of our way to eat gebrokts on this day, without fear that the matzah may become chametz.
Talk by the Lubavitcher Rebbe, of righteous memory, Acharon Shel Pesach 5744.
Chabad does not eat Matza or Matza meal that has come in contact with water during the first seven days of passover. They do eat it on the 8th day of Passover outside of Eretz Yisroel.
A source in English is here. The footnotes have the primary sources.