I have a 50 year old house in the northeast with a 2/3 finished basement. Prior to moving in we cleaned the efflorescence off the walls in the unfinished area with muriatic acid and then sealed with a latex product call Tite seal, which i thing is similar to drylock. We then painted with exterior house latex house paint and it has held up well except for a few areas where the efflorescence bubbled back thru the paint.

The problem is now with the finished side. We experienced dampness for the last several years and run a dehumidifier in the summer. There was never any actual water or wet surface and there is no crack between the floor and the wall. We had to remove some of the panelling that was attached to 2x3 studs approx 1" from the concrete wall in order for an electrician to have access. We discovered some crumbling and sandiness in some areas of the concrete wall along with large areas of efflorescence. We wire-brushed and vacummend, then treated the efflorescence and whole wall areas with citric acid and rinsed to removed. We then used UGL drylok latex masonry treatment at UGLs recommendation. Next we painted on 2 coats of UGL drylok latex waterproofer.

Our problem is now what to do if anything about insulation. There were thick plastic sheets tacked to the studs under the panelling. I'm not a fan of using fiberglass in a living space as I am somewhat allergic so I was wondering if I should use 1' rigid foam of some kind and if the plastic should be put back up before the panelling goes back. We plan on painting the panelling so I don't want to do anything that will create a mold problem behind the wall.

Any input would be appreciated.