This is happening on 'bzr init' in a home directory. It appears there's a filename with an unexpected encoding somewhere in that directory. 'bzr init' probably shouldn't be scanning the entire directory in the first place, that's bug 501307. You'd still get a similar traceback on 'bzr add' even if bug 501307 were fixed, though, so I suppose this should be a separate bug.
This is happening on 'bzr init' in a home directory. It appears there's a filename with an unexpected encoding somewhere in that directory. 'bzr init' probably shouldn't be scanning the entire directory in the first place, that's bug 501307. You'd still get a similar traceback on 'bzr add' even if bug 501307 were fixed, though, so I suppose this should be a separate bug.