The point of ubiquity-preserve-home is that it's supposed to work smoothly behind the scenes using Ubuntu's Installer "Ubiquity".

This feature seems to be missing from the Alternate CD, which means that people who cannot boot from the Live CD cannot do do this kind of recovery. I propose we create an alternatecd-preserve-home initiative to create the same recovery options.

What you can currently do with a Live CD
If you choose not to format the partition assigned to "/", then everything on that partition that would cause problems for an Ubuntu installation should be removed (e.g. the contents of /boot, /etc, /lib, /usr, etc.), but /home and other unknown directories that might contain data will be preserved.

Doing this does not require an explicit action by the user, other than choosing manual partitioning and *not* formatting the partition assigned to "/". This may be used as a last resort to restore Ubuntu to default at the point of installation but will preserve the /home directory.

This is very possible on the Live CD. When trying this from the Alternate CD I get the following errors:
1) Debbotstrap Warning - Failure while configuring base packages.
2) Unable to install busybox-initramfs