Just chiming in like the 14,000 other people this has happened to. Like most of you I didn't remember doing this at all and thought it was some crazy Apple shenanigans. Quite frankly in the end, I just got lucky. Here was my adventure...
1. Backup old iPhone 6 to iTunes in preparation for new iPhone 7.
2. Get new iPhone (yay!) and try to restore from old backup.
3. Get an error regarding iOS versions...no biggie, update both phones to same iOS.
4. Restore from backup, easy right? Nope, get that lovely password error...poo.
5. Spend the next hour throwing every password ever at it (even tried my old MySpace one) - no dice.
6. Call Apple. Rep professionally holds back laughter telling me I'm screwed.
7. Start iCloud backup with old phone so I can restore via iCloud...says it will ONLY take 12 hours...lovely.
8. Save the 10GB iPhone backup folder to a hard drive and try to use a PC program to crack that turd.
9. Brute force cracker runs for hours...this is going to take weeks.
10. Since the other options are going to take weeks let's try throwing more passwords at iTunes hoping for a miracle.
11. Miracle happens, phone restored...whew!
Password ended up being my original password for my Apple ID...I think. I'm not sure honestly because I've had to change that password 3 or 4 times. I'm sure I chose encryption in the past even though I don't remember doing it. The reason being is that little window others have shared. The whole, "If you don't encrypt your backup you won't get all your crap restored because we're worried Putin is going to steal your iPhone data" screen. So like I said before, I just got lucky. Thankfully it doesn't appear there's a limit on how many times you can guess your password so keep trying, and good luck!
That brute force cracker is still running as we speak. I'm going to let it finish just to see how long it takes, lol!