OK, I found a workaround for this problem - which seems similar to this issue. Edit the /etc/default/console-setup file (sudo nano /etc/default/console-setup) and change the CHARMAP="UTF8" to CHARMAP="ISO-8859-1" then reboot. After that, the game should run with the correct characters.

The Infocom games save and restore games using direct block access on the disk. This means you can use any disk image for saves. The saves won't show up in the directory. In fact, one of the save positions will overwrite the directory itself, so the directory will look all garbled. This means you need to emulate a 1541 (or a 1541-II) and load a blank disk image into the drive. After a save to position 1, the disk image will still appear blank, but it won't be.