Are they that bad? No, but they aren't that good either.
Standards have declined quite a lot in recent years as a result of their debt problems and serious mis-management, and you can sometimes find cabin crew who are a little bit miffed about things going on with the company, but they are still a very reasonable airline to travel with. Varig in 2006 is definately not the same as Varig 1996, but they generally do the job.
Varig are no longer the domestic airline of choice here, TAM and GOL are both considered better than Varig in their market segments and it's been a while since I flew Varig in Brazil. Again, they aren't the best and won't be winning any service awards, but they do have a good route network and they will get you where you are going.
One thing to remember is that their situation will have been resolved before September, so you will need to keep up with any developments in the coming months. As has been mentioned they will probably be split into two new carriers, one domestic and the other international. What that means for the traveller is anybody's guess.
ab