All the data should be encrypted and only the user's password should be able to decrypt the data. That way you eliminate the problem of someone peaking into your files.
How would a 'forgot password' function work in this case? If you're using something like GPG to encrypt and the password is basically the passphrase for the key, a customer forgetting his/her password would become an irreversible event, and he/she would end up losing all data.
