Hi Kimberly
I don't think Google did anything to purposely hurt the site. The AdWords and Organic search depts are really huge in themselves, and I don't think there is much cross-conversation there. What sort of quality scores are you getting from AdWords for your pages? Are they good?
Bounce rate is a weird metric. A lower bounce rate could be bad too, because users are maybe not easily finding what they want on the landing page and are forced to click around.
Definitely play with the ads. Keep specific notes about what you change and when. And keep in mind, it may take some time (weeks) to reflect in any ranking change.
You should also make a proper 404 page in the template/design of your site - it's just the default server message. These sort of things help show Google you are a responsible site owner
Internally, you should also avoid linking to 301 redirects. Link straight to your final URL. For example you link to http://www.homespellingwords.com/About (capitol A) but it redirects to http://www.homespellingwords.com/about (lowercase a). This hurts crawl efficiency and reduces how link authority flows through the site. This happens a LOT on your site, so update all your links