This is a bit confusing but if I follow you correctly, you are asking why the new OS isn't booting up? How to get around this and make sure that it boots and uses the new documents folder?
Well there's a couple of ways you can make things work. You can go to the bios and point the machine to the correct drive to boot from, which I wouldn't suggest(cause you have 2 copies of WinXP on there and it's not needed). Or you could extract all the data that you need from the old C: drive and then blow WinXP away on the old drive(just delete WinXP). Then after you do this, make sure your new drive is master, old is slave or secondary master or whatever, and allow it to boot from this as your new C: drive. I would probably just reformat the new drive and start from scratch after deleting the WinXP OS from the old hard drive.