I got my son Animal Crossing for the DS for Christmas and he thought it might be fun to name his town after a fish:
We didn't notice until he'd invested some time in his new character. After a good laugh, I tried to help him rename his town and rebuilding seemed to be the only option:
He's pretty nervous about proceeding and I don't know what to suggest. Will he lose everything? It sure sounds like it.
The only other think I can think of is that he has a character on the Wii version of Animal Crossing and there seems to be a way to move character between them. We're not at home at the moment for me to experiment. Can we console him by promising that he can move his Wii Animal Crossing character to his DS? I guess that's unlikely too.