It's like a car disc brakes or rim brakes for that matter, you have to keep checking the pads every so often for wear. Sometimes the pads disintegrate/fall apart or get too thin. A general and safe method is to change them when they get half (50%) or 1/3 left from their original thickness. The increased travel on your levers is a warning/indicator and unfortunately it seems, from your description, whatever friction material that was left started to fall apart/bond failure after that point. In any case, I believe Kool Stop makes pads for your brake system..about $13.00, Aztec pads are approx $1.00 cheaper.
Off topic: IMHO, most bike disc rotors have way too many "cutout" slots/cross-drilled holes in them. While it may look cool and a weight saver, the pad scraping action is too aggressive (affects pad life unless you are racing and change pads after every race) and there's too little effective braking surface area because of all the removal of metal. Beginning to see small startup companies offering/making solid disc rotors and slotted rotors (with only only 5-6 grooves or slots much like automotive performance slotted rotors) and some of the major bike and aftermarket companies have rotors with a minimal of slots/holes.