as you’re finding the Apple Watch 3 only has low storage and, I think, needs at least 3 Gb spare for the update.
The only way I could install watchOS 7 was ...
1. Unpair and reset the watch
2. Re pair the watch but setup as new
3. Remove as much as possible from the watch...unused watch faces, Apps etc.
4. Check the watch has at least 3 Gb
5. Update the watch
6. Unpair and reset the watch
7. Re pair the watch and either set up as new or restore from a previous backup (but not the one from 6.)
Since I only use mine for sleep tracking I’ve more or less decide I won’t bother with any further (major) updates, too much ‘faffing’ !