First thank you for the photo, it really helps. I have seen and painted this type of paneling before. You are probably correct assuming the paneling wasn't properly prepped before painting.
This is unfortunate, but you have what you have. I have a few ideas that might help. You will have to decide which ones or which combination will work best for you.
You are correct; painting over loose and chipping paint will solve nothing and only make it worse later. It is best to remove all of the loose paint, but scraping will leave behind ugly areas where the paint was removed.
Stripping is a possibility. This will require either using a chemical paint stripper, a heat gun or infrared stripping system (similar to a heat gun but safer and faster). Paint stripping will be somewhat labor intensive and time consuming. If you decide to strip the paint, call your local rental companies and see if they have an infrared paint stripper that you can rent.
I would first try the scraping method and see how that works.
Carefully scrape the loose paint and, if possible, try to lightly sand the rough edges (feathering). This will be difficult, if you sand too much a smooth area will result and it will show when painted. Try scraping and lightly sanding in an area that is less visible, perhaps behind an entertainment center or couch.
You don't have to remove every piece of loose paint if you don't want to. Concentrate on the worst and most obvious areas and see how it works for you. Prime any raw unpainted areas with a good primer, oil based or acrylic, before painting.
Another primer that can be used is Peel Stop. This is a thin latex emulsion that can penetrate into tint cracks or splits in the paint. It can act as glue in some situations. Peel Stop won't do anything to the large peeling areas but could help the small lifted areas.
To help these areas re-glue themselves, use a wallpaper seam roller to push the lifted paint back down onto the paneling before applying the primer and a few minutes after applying the primer. Try this on a small section before spending the effort and time to do it to an entire room and see if it will work for you.
Check out <a href="https://www.house-painting-info.com/painting-paneling.html">Painting Paneling</a> for more information.