However, this also shows why having a "backup" is always a good idea. So when/if you do recover what you can recover, you might also consider setting them up with some form of automatic backup such that should this (or a disk failure, which is always a possibility) occur in the future, recovery can be "restore from latest backup" instead of the task you are now facing.
However, an equally good idea when faced with a sudden and utterly unexpected situation, is to not immediately try to solve the problem without understanding what actually happened. The chances of the "fix" doing more harm than good is high.
That said, consumer software should definitely not assume that the user understands how the internals work. In this case, rather than a popup being shows, it would have been more appropriate to give the user a full-screen walkthrough, similar to the first-launch experience, explaining what has happene, what Windows has done, that the documents and pictures are most likely safe, and finally include warnings about the active profile, and associated documents and pictures, being deleted when logging out.
I would be much better to show an error at login saying there is a problem with the account and a question like "Would you like to log in as a guest user?"
That's basically what I was suggesting.