I am really sorry to hear about your father. What a difficult to deal with at anythime of your life, especially during medical school.
I am on the recruitment committee in my residency program, and unfortunately red flags are often discussed by the committee and have an influence on any person's application. BUT failing step 1 is a red flag, just like getting a bad eval or letter of rec, or not having any extra-curriculars, or having a bad interview, which many applicants have.
My experience is that those that address it, say how they learned from it, not just providing an excuse, have the best chance of overcoming it. We had two applicants that failed step 1 that I remember off hand. One never mentioned it once, nor did their LOR's address it. One person mentioned it in their personal statement and one of their LOR's or dean's letter addressed it as well. The person who was open about it was much more highly ranked.
I would study your butt off for step 2 and take it so you have the score back before application season. And work hard during your clinical years. If you find a particular rotation that you did well at and formed a good bond with a faculty member, discuss it with them, and see if they would feel comfortable writing a letter that even says that the failure of step 1 is not an accurate reflection of who you are as a student. Things like this go a long way.
Your stressor was a HUGE contributor to your step 1 performance, regardless of how well you did the second time, and programs will understand this. Peds is a family-oriented specialty so we understand things like this. But your best bet would be to work hard to make sure this is your only red flag. If you do poorly on step 2, have poor clinical performance, get bad LOR's, etc, it will be harder to overcome these red flags. But if you otherwise do well, your step 1 performance will have little bearing on your app. And if you are still worried about it when youre a fourth year, go rotate at the programs in which you are strongly interested and show them first hand how good you are.
Seriously, do not stress out too much about this. You can't change your score at this point and if you worry about it, it will just eat at your confidence and make your clinical years less enjoyable. Your third year of medical school is the most fun you never want to have again and your fourth year is the most fun you would love to have for the rest of your life, so work hard, enjoy it, and you will be just fine when its time to apply. Remember, peds is still a less competitive field, and there are good applicants with red flags on their apps matching at great programs across the country year after year.
