If the character has a 16 agility and a 13 strength, I would tend to agree. But I think you're overlooking the possibility that the character's stats are 9, 7, 8, 5, 7, 13. When a player's only surviving funnel character is going to be bad at more or less any class, I don't think the judge is out of line to try to help her out a bit.
That said, there's an extent to which DCC begs players and GMs alike to set aside the stigma of a TPK. If everyone in the party is saddled with truly inept characters -- and isn't having fun role-playing that situation -- then maybe a clean sweep might be for the best.
And here's another possibility: have the sad-sack group rest up in town for a week or so nursing their wounds while you run a different set of 0-levels through a separate funnel adventure. Then either merge the survivors of both parties, or alternate between parties week after week, with both parties in the same campaign, each hearing rumors about the other, while never quite crossing paths.
I think all your ideas are good, but I disagree with the first paragraph. The 9, 7, 8, 5, 7, 13 PC is basically one that nature didn't favor. He's sickly, dumb, clumsy and weak. When his luck runs out, is he more likely to die underground than someone with more physical/mental gifts? Yes. And that's as it should be. The DM should not favor weak PCs, but should instead "let the dice fall where they may." Every character should play by the same rules.
"Let the characters die if the dice so dictate it. Nothing is as precious as a PC’s life when it can be taken away—and nothing is so unchallenging as a game where the players know the judge will not kill their characters. The DCC RPG is designed for high character death rates—let this be true in your game as well. Achieving 5th level in the DCC RPG is a true accomplishment." p. 314.
Achieving SECOND level with a 7 intelligence Wizard should be a "true accomplishment" -- not something the DM bends the rules to create.