This bug was fixed in the package user-setup - 1.23ubuntu16

---------------
user-setup (1.23ubuntu16) jaunty; urgency=low

  * Don't offer encrypting the home directory if the selected user's home
    directory already exists (LP: #321345).
  * Update Ubuntu-specific strings from Launchpad.

 -- Colin Watson <[email protected]>   Wed, 01 Apr 2009 12:38:09 +0100

** Changed in: user-setup (Ubuntu Jaunty)
       Status: Fix Committed => Fix Released

-- 
user-setup-apply breaks if home directory already exists and encrypted-home 
selected (?)
https://bugs.launchpad.net/bugs/321345
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