System file load crash and free HDD space wiper

2 things really, 1:
Ive had to recover my Win7 OS from a back-up made last feb, bit far back, didnt wanna go that far, stupid me didnt make regular back-ups .
Basically I clicked a box that what looked like to me, the window pop up you get when windows installs updates and asks if you want to restart or postpone, I clicked restart, It restarted and that was the first time I have ever seen my laptop show the black screen with "System File Load" and a white bar below it showing the load progress, have seen it on my other laptop with Win XP but not mine, as it gets near the end it fails and reverts to scanning the system files in BIOS, then says to try rebooting and if the issue persists, contact your manufacturer. I tried rebooting several times, same thing, tried Safe Mode, same thing. I tried a restore point but they'd been wiped. There was no disc supplied with my Win 7 OS so I couldn't try and fix any issues in the boot loader. All in all, Had to boot from a back-up on my external drive.
TBH, I reckon that box was a virus, surely that box windows update throws up can easily be replcated and used in infections?
After the recovery Avast refused to work, despite me reinstalling a new one and windows update services needed restarting through services tab in administrative tools because it wouldn't download and install updates. So:
System file load failing
Safe mode failing
Restore points wiped
Windows update failing

Anybody have any idea what it could have been?

And the second thing:
I store usernames and passwords and other confidential stuff in files because im extremely forgetful, I encrypt them using TrueCrypt but as I delete things, I know they are still stored on free space on the hard drive. I used a file recovery programme to see if they were still there and I did use BCWipe but it was only a trial version.

As ive had to recover my system to a previous date, I lost all my software. ATM im using "Orion file recovery" but im looking for the best free File recovery and free space wiping software so I can recover anything I made a mistake deleting and wiping the free space so if my laptop is ever stolen or lost (you never know), nobody can see my stuff, My HDD password should keep people from getting onto the OS.

Any suggestions?