I fell into that situation. iPhone 3GS, started with iOS 3, upgraded to iOS 4, but while I used a passcode my data wasn’t fully encrypted. Or at least, as encrypted as it can be.
Apple has an article that explains it all.
It was time-consuming to perform on my part because I have a lot of data and almost full iPhone. But it’s a one-time operation. I just started things before I went to bed and let it roll.
If you have a recent iOS-device, you’d do well to check to ensure your data is fully encrypted (the articles explain how to check), and if not, take the time and trouble to remedy it.
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