I encountered this bug too.  Here is how I was able to work around it.

After using the System->Administration->Users and Groups tool to change
my password, I encountered the conditions exactly as the original bug
filer did under "2 - What actually happened" in his bug report.

I pressed Ctrl-Alt-F1 on my keyboard to bring up one of the non-GUI
login prompts.  From there, I logged in to my account using the old
password.

At the prompt I used the passwd command.  It asked for the current
password, so I gave it the old password.  Then I entered in the new
password and again to confirm.

After that I rebooted and was able to log in with my new password.

I hope that helps someone who is locked out of their system.

-- 
9.10 karmic gdm login fails after changing password (users-admin) when home 
folder encrypted (ecryptfs)
https://bugs.launchpad.net/bugs/470129
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