You can find the expression in the Urban Dictionary, so it's likely a slang expression that's common in limited circles. I suspect that the expression flows from the caterpillar/butterfly "rebirth" rather than animals like snakes, that shed their skin only to accommodate getting longer.
Urban Dictionary: "To lose one's old ways; To become a changed man or woman".
The definition only addresses change, not whether it's good or bad. In fact, one of the examples they give is a negative change. But consider some examples:
Suppose someone was a milquetoast who always got taken advantage of, and morphed into a super-assertive, obnoxious person. That might be an improvement for them but a negative for everyone else.
Suppose someone who was always extremely cognizant of safety decided that they were missing out on the thrills that others were experiencing and started engaging in extremely risky behavior that put themselves or others in danger. Or someone who never bent the rules decides that they've been a chump while others flaunt the rules, get away with it, and benefit. So they decide it's time to get a piece of the action and become a criminal.
The phrase would apply in those cases. To some extent, whether the change is good or bad is in the eye of the beholder. But the expression doesn't apply only to positive change.
And, of course, if the person contracted a disease that caused them to literally shed their skin, that would certainly be horrible, without a doubt.
The phrase isn't in common use, at least in the circles I travel in, but it has crossed my path. When I've heard it, those usages carried a slightly different connotation. It wasn't simply that the person had morphed into a different person, but more that the "real" person had come out, or at least their potential had been actualized.
If that is actually more the meaning, you probably wouldn't want to use the expression in a case like the end of your question. If the person had "fallen to the bottom", and this connotation is true, that would be saying not only had they changed in a negative way, but they were really always that way on the inside.