To start, if you're in a homegroup, exit it*. Once every PC has left the homegroup, it no longer exists.
Next, to disable HomeGroup and change encryption levels, open the Control Panel, select Network and Internet, then Network and Sharing Center. Once there, in the left-hand pane choose Change advanced sharing settings.
In the Home or Work section of the dialog box, scroll down to File Sharing Connections and click the radio button for Enable file sharing for devices that use 40- or 56-bit encryption. (Note: You need this setting anyway, if you want to share files between Win7 and an XP box. More on this to come.)
Next, a bit further down under HomeGroup connections, select Use user accounts and passwords to connect to other computers.
Save the changes, and you're done!
* To leave a home group: Open HomeGroup by clicking the Start button , clicking Control Panel, typing homegroup in the search box, and then clicking HomeGroup. Click Leave the homegroup, and then click Finish.