Depending on the circumstances of the encounter I'd rather play it off as if the characters had been knocked out instead of killed. Perhaps they end up in a prison or are enslaved, thus losing a certain amount of levels due to atrophy. Perhaps whoever defeated them left them for dead but stole all of the equipment and gold they were carrying. I'd rather keep the characters alive and introduce a major setback for the party rather than have the players roll up new characters or end a campaign early.