Iceblossom

Yikes! The scrunchy is an issue I don't think I can solve and I think the fabric is indeed stained -- hopefully someone will come up with a better answer than this.

The best fix I can think of for this is to use a piece of nice quality bridal illusion veil (or maybe a wavy organza or similar) or lace or both. You don't want the heavy coarse tulle, you want veiling or a very thin lace that feels nice to touch. You'd put it over the discolored areas and then add some extra decorative stitching to hold it down. I'd quilt it through but it can be done just top layer by hand.

For the non-embroidered area, you can applique in a piece if you have any left, or this is where I would bring in the lace, I'd cut it along its design units, overlapping the illusion veil part if possible, as a large-ish free form applique if not.

You can help balance out the cover up by doing a similar thing in the opposite corner.

And when all else fails, you remind both yourself and your daughter that you love each other despite each other's faults. It was made with love and it will warm her with love, and together you can rise above this error... but I know the sick feeling when you open up the washer and the project is awful. This is not awful, I think it can be and is worth saving!