Scrape the concrete surface with a wet application of sand. A sandblaster, if applied wet, does not require a permit from the city. Normally, a high-powered blast of fine sand is sprayed with a small amount of water on the wet wall. This removes all the flakes. What will remain is a pitted concrete face. For less severe jobs, a power sander with a very rough paper will do fine.
Spray the surface down with several coats of a titanium oxide waterproofing membrane. This is a substance, a pure acrylic, that is sprayed on the surface of a pitted or damaged concrete surface. This will do several things. First, it will fill in all the voids deep into the concrete surface. Second, it will seal off all the pores of the concrete. It also seals the rusted rebar, ensuring that no further corrosion will occur. Finally, it increases the strength of the concrete, sometimes by as much as 20 percent or more.
Avoid digging out the rebar unless there is no other option. Digging out the rebar may destroy most of the foundation, is a time consuming task and can be very expensive. Unless the concrete spalling is damaging the integrity of the concrete, scraping and spraying should do the job. Usually, spalling does not imply a structural weakness in the concrete itself. Since rusted steel takes up about three times the amount of space that uncorrupted steel does, the expanding rebar forces the concrete to crack. In general, this does not, except in extreme cases, cause the concrete to become structurally damaged. When you seal and coat the face of the pitted concrete, the substance is absorbed deeply into the concrete and surrounds the rebar. It prevents further expansion and fills in all the cracks.